11) Lisa is pondering the construction and operation of a home-based cattery. Sh
ID: 327222 • Letter: 1
Question
11) Lisa is pondering the construction and operation of a home-based cattery. She expects it will cost $35,000 to construct and will have a lifespan of four years before it collapses due to faulty construction and ammonia rot. Cash flows during those four glorious years are estimated as follows:
Year
Inflow
Outflow
1
6,000
3,000
2
7,000
3,300
3
8,000
3,600
4
9,000
3,900
If the interest rate is 5%, what is the present value of the cattery project?
A) -18,800
B) -20,790
C) -26,378
D) -47,168
Year
Inflow
Outflow
1
6,000
3,000
2
7,000
3,300
3
8,000
3,600
4
9,000
3,900
Explanation / Answer
11.
Correct Answer:
B) -20,790
Working note:
Initial cost = $35000
Net cash inflow in year 1 = 6000-3000 = $3000
Net cash inflow in year 2 = 7000-3300 = $3700
Net cash inflow in year 3 = 8000-3600 = $4400
Net cash inflow in year 4 = 9000 - 3900 = $5100
So,
Present value of the project = 3000/1.05 + 3700/1.05^2 + 4400/1.05^3 + 5100/1.05^4 – 35000
Present value of the project = - $20790.2 or $20790
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