Question

Murray is planning a project that will cost $22,000. The annual cash inflow, net of income taxes, will be $5,000 a year for 7 years. The present value of $1 at 12% is as follows: Period Present Value of $1 at 12% 1 .893 2 .797 3 .712 4 .636 5 .567 6 .507 7 .452 Using a rate of return of 12%, what is the present value of the cash flow generated by this project?
A. $22,600.
B. $22,820.
C. $34,180.
D. $35,000.

Answer 1

Answer:

The correct option is b. $22,820

Explanation:

For computing the present value of this project, we have to multiply the yearly  cash inflows with their present values which is shown below

In mathematically,

Present value = Year 1 cash inflows × present value factor of year 1 + Year 2 cash inflows × present value factor of year 2 + Year 3 cash inflows × present value factor of year 3 + Year 4 cash inflows × present value factor of year 4 + Year 5 cash inflows × present value factor of year 5 + Year 6 cash inflows × present value factor of year 6 + Year 7 cash inflows × present value factor of year 7

= $5,000 × 0.893 + $5,000 × 0.797 + $5,000 × 0.712 + $5,000 × 0.636 + $5,000 × 0.567 + $5,000 × 0.507 + $5,000 × 0.452

= $4,465 + $3,985 + $3,560 + $3,180+ $2,835 + $2,535 + $2,260

= $22,820

Hence, the present value of the cash flow generated by this project is $22,820

Therefore, the correct option is b. $22,820