Required information The following information applies to the questions displaye

Question

Required information The following information applies to the questions displayed below. Peng Company is considering an investment expected to generate an average net income after taxes of $2,500 for three years. The investment costs $55,200 and has an estimated $7800 salvage value. Assume Peng requires a 15% return on its investments. Compute the net present value of this investment. Assume the company uses straight-line depreciation. (P of $1, A of$1. P AofS1 and EVA?S) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign.) Cash Flow Annual cash flow Residual value Select Chart Amount x P orPresent Value Net present value

Explanation / Answer

Cash flow

Select chart

Amount

PV Factor

Present Value

Annual cash flow

Present value of annuity of $1

$18,300

2.283225

$41,783.02

Residual Value

Present Value of $1

$7,800

0.6575162

$5,128.63

Present Value of cash inflows

$46,911.65

Present Value of cash outflows

$55,200.00

Net Present Value

$(8,288.35)

Straight Line Depreciation = [Cost – Residual Value] / useful Life

= [$55,200 – 7,800] / 3 Years

= $15,800 per year

Annual cash inflow = Net Income + Depreciation

= $2,500 + 15,800

= $18,300

“Hence, The Net Present Value [NPV] of the Investment = $(8,288.35), Negative NPV”

Cash flow

Select chart

Amount

PV Factor

Present Value

Annual cash flow

Present value of annuity of $1

$18,300

2.283225

$41,783.02

Residual Value

Present Value of $1

$7,800

0.6575162

$5,128.63

Present Value of cash inflows

$46,911.65

Present Value of cash outflows

$55,200.00

Net Present Value

$(8,288.35)

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