Question

Wellman Company is considering investing in a two-year project. Wellman's required rate of return is 10%. The present value of $1 for one period at 10% is 0.909 and for two periods at 10% is 0.826. The project is expected to create cash flows, net of taxes, of $80,000 in the first year, and $100,000 in the second year. Wellman should invest in the project if the project's cost is less than or equal to:

a. $180,000
b. $163,620
c. $155,320
d. $148,680

Answer 1

c. $155,320

Step-by-step explanation:

The computation of the project cost is shown below:

= Cash inflow in year 1 × discount factor in year 1 + cash inflow in year 2 × discount factor in year 2

= $80,000 × 0.909 + $100,000 × 0.826

= $72,720 + $82,600

= $155,320

By multiplying the discount factor of each year with the cash inflow of that year, the present value of that year will come.