Brett Collins is reviewing his company’s investment in a cement plant. The compa

Question

Brett Collins is reviewing his company’s investment in a cement plant. The company paid $14,700,000 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 8 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. (Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar.)

Year 1 Year 2 Year 3 Year 4 Year 5 Expected $ 3,340,000 $ 4,980,000 $ 4,610,000 $ 5,160,000 $ 4,270,000 Actual 2,670,000 2,980,000 4,900,000 3,830,000 3,540,000

Explanation / Answer

Answer a

Computation of the net present value of the Expected cash flows

Answer b

   Computation of the net present value of the actual cash flows

Summary

Note : As PV factor table is not provided , 6 place decimal value is taken for more accurate answer.  

Years Expected Cash Flows ($) Dis Factor @ 8 % Discounted Cash Flows ($) 0 - Intial Investment - 14,700,000 1 -14,700,000 1 3,340,000 0.925926 3,092,593 2 4,980,000 0.857339 4,269,548 3 4,610,000 0.793832 3,659,566 4 5,160,000 0.735030 3,792,755 5 4,270,000 0.680583 2,906,089 Net present value of the Expected cash flows $3,020,551

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