Question

Door to Door Moving Company is considering purchasing new equipment that costs $ 700 comma 000$700,000. Its management estimates that the equipment will generate cash flows as​ follows:Year 1$ 214 comma 000$214,0002214 comma 000214,0003262 comma 000262,0004262 comma 000262,0005158 comma 000158,000Present value of​ $1:​6%​7%​8%​9%​10%10.9430.9350.9260.9170.90920.8900.8730.8570.8420.82630.8400.8160.7940.7720.75140.7920.7630.7350.7080.68350.7470.7130.6810.6050.621The​ company's annual required rate of return is​ 8%. Using the factors in the​ table, calculate the present value of the cash inflows.​ (Round all calculations to the nearest whole​ dollar.)

Answer 1

The present value of the cash inflows is $889,713

Step-by-step explanation:

For computing the present value of the cash flows, we have to multiply the yearly cash flows with there yearly present value factor.

The present value factor is given in the question

But if you want to learn than you can see the calculation which is shown below:

= 1 ÷ (1 +rate) ∧ number of year

number of year = 0

number of year = 1

Number of year = 2

number of year = 3

So,

Rate = 8%

For year 1 = 0.9259 (1 ÷ 1.08) ∧ 1

For year 2 = 0.8573 (1 ÷ 1.08) ∧ 2

For year 3 = 0.7938 (1 ÷ 1.08) ∧ 3

For year 4 = 0.7350(1 ÷ 1.08) ∧ 4

For year 5 = 0.6806 (1 ÷ 1.08) ∧ 5

Now, multiply this present value factor with yearly cash inflows

So

The present value of year 1 = $214,000 × 0.9259 = $198,148

The present value of year 2 = $214,000 × 0.8573 = $183471

The present value of year 3 = $262,000 × 0.7938 = $207984

The present value of year 4 = $262,000 × 0.7350 = $192578

The present value of year 5 = $262,000 × 0.6806 = $107532

And, the sum of all year cash inflows is $889,713

Since, in the question the company has 8% rate of return so we use only 8 % rate of return

Hence, The present value of the cash inflows is $889,713