Question

Applying Time Value Factor A factory costs $672,700. You forecast that it will produce cash inflows of $370,545 in year 1,$155,000 in year 2 , and $200,000 in year 3 . The discount rate is 9.50%.

a. Calculate the PV of cash inflows. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. Should the company invest in the factor?

Answer 1

The present value (PV) of cash inflows is calculated using the PV formula, taking into account a discount rate of 9.50%. We determine the PV for each year's cash inflow and sum these up to get the total PV. The investment is considered beneficial if the total PV exceeds the cost of the factory.

Step-by-step explanation:

To calculate the present value of cash inflows, we apply the formula for present value (PV), which is PV = CF / (1 + r)^n, where CF is the cash inflow, r is the discount rate, and n is the number of periods (years in this case). For a discount rate of 9.50%, the calculations for each year would be as follows:

• PV Year 1 = $370,545 / (1 + 0.095)^1
• PV Year 2 = $155,000 / (1 + 0.095)^2
• PV Year 3 = $200,000 / (1 + 0.095)^3

After calculating the present values for each year, we then add up all the present values to get the total present value of cash inflows. To determine whether or not to invest in the factory, we compare the total present value of the cash inflows to the cost of the factory. If the total present value is greater than the cost, the investment is considered beneficial.