Required information Use the following information for the Quick Study below. Th

Question

Required information Use the following information for the Quick Study below. 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 $3,000 for three years. The investment costs $56,700 and has an estimated $6,300 salvage value. QS 11-8 Net present value LO P3 straight-line depreciation. (PV of St. FV of S1. PVA of $1, and EVA of $) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign) Assume Peng requires a 10% return on its investments Compute the net present value ofthis investment. Assume the company uses Factor Val elect Chart Annual cash low Residual value Net present value

Explanation / Answer

(1). Net present value pf the project = - $2727.04

Explanation;

First of all let’s calculate annual cash flows;

Annual cash flow = Annual net income + Depreciation

Annual net income after tax is given = $3000

Depreciation ($56700 – $6300) / 3 = $16800

Thus annual cash flow ($3000 + $16800) = $19800

Annual cash flow in year 3 will be (Annual cash inflows + Salvage value) $19800 + $6300 = $26100

Now let’s calculate project’s net present value;

Year

Annual cash flows

Discounting factor @ 10%

Present value

0

($56700)

1

($56700)

1

$19800

0.9091 (Approx.)

$18000

2

$19800

0.82644 (Approx.)

$16363.64

3

$26100

0.751314 (Approx.)

$19609.32

Net present value of project

- $2727.04

Year

Annual cash flows

Discounting factor @ 10%

Present value

0

($56700)

1

($56700)

1

$19800

0.9091 (Approx.)

$18000

2

$19800

0.82644 (Approx.)

$16363.64

3

$26100

0.751314 (Approx.)

$19609.32

Net present value of project

- $2727.04

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