Required information [The following information applies to the questions display

Question

Required information [The following information applies to the questions displayed below.] Following is information on an investment considered by Hudson Co. The investment has zero salvage value. The company requires a 12% return from its investments Investment A1 $ (200,000) Initial investment Expected net cash flows in year: 100,000 90,000 75,000 2 Compute this investment's net present value. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round all present value factors to 4 decimal places.) Present Value of 1 at 12% Cash Flow Present Value Year 1 Year 2 Year 3 Totals Amount invested Net present value 0 0

Explanation / Answer

1. Net Present Value = Present Value (PV) of cash inflows - Present value (PV) of cash outflows

PV of cash inflows = PV (12%,1year) * $100000 + PV (12%,2 Years)* $90000 + PV (12%,3 Years)* $75000

= (0.893 * $100000) + (0.797 * $90000) + (0.712 * $75000) = $89300 +$71730 +$53400 = $214430

PV of cash outflows = Initial investment = $200000

Net Present Value = $214430 - $200000= $14430

2. Net Present Value = Present Value (PV) of cash inflows - Present value (PV) of cash outflows

PV of cash inflows = PV of all cash inflow + PV of salvage value

PV of cash inflows = PV (12%,1year) * $100000 + PV (12%,2 Years)* $90000 + PV (12%,3 Years)* $75000 + PV (12%,3 Years) * $20000

= (0.893 * $100000) + (0.797 * $90000) + (0.712 * $75000) + (0.712 * $20000) = $89300 +$71730 +$53400 +$14240 = $228670

PV of cash outflows = Initial investment = $200000

Net Present Value = $228670 - $200000= $28670

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