Question

Beyer Company is considering the purchase of an asset for $220,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Assume that Beyer requires a 12% return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Year 1 Year 2 Year 3 Year 4 Year 5 Total Net cash flows $ 87,000 $ 56,000 $ 96,000 $ 126,000 $ 48,000 $ 413,000 a. Compute the net present value of this investment. b. Should Beyer accept the investment?

Answer 1

a) NPV= $287,202.75

b) the project should be accepted

Step-by-step explanation:

The Net present value (NPV) is the difference between the Present value (PV) of cash inflows and the PV of cash outflows. A positive NPV implies a good and profitable investment project and a negative figure implies the opposite.

NPV = PV of cash inflow - PV of cash outflow

Present value of cash inflow:

(87,000 × (1.12^(-1)) + ( 56,000 × 1.12^(-2)) +( 96000 ×1.12^(-3) + (126000 ×1.12^(-4) + ( 48,000× (1.12^(-5)) + (413,000×(1.12^(-5))

Initial cost = 220,000

NPV = 507,202.75 - 220,000 =

= $287,202.75

b) Since the project produced a positive NPV of $287,202.75, it implies that accepting the project would increase the wealth of the shareholders of Beyer Company by $287,202.75 . Therefore, the asset should be purchased