Brett Collins is reviewing his company’s investment in a cement plant. The compa
ID: 2523803 • Letter: B
Question
Brett Collins is reviewing his company’s investment in a cement plant. The company paid $15,300,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company’s discount rate for present value computations is 9 percent. Expected and actual cash flows follow: (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Required
a.&b. Compute the net present value of the expected and actual cash flows as of the beginning of the investment
Year 1 Year 2 Year 3 Year 4 Year 5 Expected $ 3,370,000 $ 4,930,000 $ 4,630,000 $ 5,010,000 $ 4,220,000 Actual 2,670,000 3,010,000 4,870,000 3,870,000 3,530,000Explanation / Answer
CALCULATION OF THE NET PRESENT VALUE OF THE EXPECTED CASH FLOW Years Cash Flow (A) PVF @ 9% (B) Present Value (AXB) 0 $ -1,53,00,000 1 $ -1,53,00,000 1 $ 33,70,000 0.9174 $ 30,91,743 2 $ 49,30,000 0.8417 $ 41,49,482 3 $ 46,30,000 0.7722 $ 35,75,210 4 $ 50,10,000 0.7084 $ 35,49,210 5 $ 42,20,000 0.6499 $ 27,42,710 TOTAL $ 18,08,356 CALCULATION OF THE NET PRESENT VALUE OF THE ACTUAL CASH FLOW Years Cash Flow (A) PVF @ 9% (B) Present Value (AXB) 0 $ -1,53,00,000 1 $ -1,53,00,000 1 $ 26,70,000 0.9174 $ 24,49,541 2 $ 30,10,000 0.8417 $ 25,33,457 3 $ 48,70,000 0.7722 $ 37,60,534 4 $ 38,70,000 0.7084 $ 27,41,606 5 $ 35,30,000 0.6499 $ 22,94,258 TOTAL $ -15,20,605
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.