Question

A factory costs $500,000. You forecast that it will produce cash inflows of $145,000 in year 1, $205,000 in year 2, and $350,000 in year 3. The discount rate is 10%.

What is the value of the factory? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

$64,199.85

Step-by-step explanation:

You want the present value of the series of annual cash flows of -500, 145, 205, and 350 thousand dollars, the first being immediate, and the last being in year 3. The discount rate is 10%.

Present value

The present value of each cash flow is ...

PV = P(1 +r)^-t

where r is the discount rate and t is the number of years until the flow of P is realized. The value of the factory is the sum of the present values of the cash flows.

Application

The attached calculator screen shows the computation of the present value.

The value of the factory is about $64,199.85.

<95141404393>