Question

Exeter Division of Wetherby Labs acquired an asset with a cost of $800,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows:

a) $200,000 in Year 1, $200,000 in Year 2, $200,000 in Year 3, $200,000 in Year 4

b) $250,000 in Year 1, $200,000 in Year 2, $175,000 in Year 3, $175,000 in Year 4

c) $225,000 in Year 1, $225,000 in Year 2, $175,000 in Year 3, $175,000 in Year 4

d) $200,000 in Year 1, $200,000 in Year 2, $225,000 in Year 3, $175,000 in Year 4

Answer 1

To evaluate the profitability of the investment, it is necessary to calculate the present value of the cash flows by discounting them using the appropriate discount rate.

Step-by-step explanation:

The Exeter Division of Wetherby Labs acquired an asset with a cost of $800,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows:

1. $200,000 in Year 1, $200,000 in Year 2, $200,000 in Year 3, $200,000 in Year 4
2. $250,000 in Year 1, $200,000 in Year 2, $175,000 in Year 3, $175,000 in Year 4
3. $225,000 in Year 1, $225,000 in Year 2, $175,000 in Year 3, $175,000 in Year 4
4. $200,000 in Year 1, $200,000 in Year 2, $225,000 in Year 3, $175,000 in Year 4

To calculate the present value of the cash flows, we need to discount them using the appropriate discount rate. The discount rate takes into consideration the time value of money and inflation. Once discounted, we can determine the present value of the cash flows and evaluate the profitability of the investment.

The discount rate may vary depending on the risk associated with the investment, the prevailing interest rates, and inflation expectations. By discounting the cash flows, we can compare them to the initial cost of the asset and determine if the investment is worthwhile.