Question

A factory costs $400,000. You forecast that it will produce cash inflows of $120,000 in year 1, $180,000 in year 2, and $300,000 in year 3. The discount rate is 12%. a. What is the value of the factory? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Value of factory = $64,220

Step-by-step explanation:

Here, for the given information,

To calculate value of factory we will calculate the Net Present Value.

Net Present Value = Present value of cash inflows - Present value of cash outflow.

Present value of cash outflow = Cost of factory today = $400,000

Discounting factor @ 12% for each year shall be

Year 1 =
`(1)/((1+0.12)^1) = 0.893`

Year 2 =
`(1)/((1+0.12)^2) = 0.797`

Year 3 =
`(1)/((1+0.12)^3) = 0.712`

Therefore, present value of cash inflows =
`(120,000 * 0.893) + (180,000 * 0.797) + (300,000 * 0.712) = 464,220`

Net Present Value = Value of factory = $464,220 - $400,000 = $64,220