(Ignore income taxes in this problem.) The Becker Company is interested in buyin
ID: 2390126 • Letter: #
Question
(Ignore income taxes in this problem.) The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment:
Cost of required equipmwnt.......$250,000
Working capital required........... $100,000
Annual operating cash flow........ $ 80,000
Cash repair at end of 4 years .... $40,000
Salvage value at end of 6 years... $90,000
This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%.
The present value of all future operating cash inflows is closest to:
Answer
A. $480,000
B. $452,300
C.$348,400
D. $278,700
Explanation / Answer
Cash Flows Year 0 =-$250,000 -$100,000 =-$350,000 Year 1-3 = $ 80,000 Year 4 = $ 80,000 -$40,000 =$40,000 Year 5 = $ 80,000 Year 6 = $ 80,000 + $ 90,000 +$100,000 =270,000 present value of all future operating cash inflows =$ 80,000/1.1 +$ 80,000/1.1^2 +$ 80,000/1.1^3 + $40,000/1.1^4 +$ 80,000/1.1^5 +270,000/1.1^6 =$428,350.36 Answer B. $452,300
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