Question

Wellman Company is considering investing in a two-year project. Wellman's required rate of return is 10%. The present value of $1 for one period at 10% is 0.909 and for two periods at 10% is 0.826. The project is expected to create cash flows, net of taxes, of $80,000 in the first year, and $100,000 in the second year. Wellman should invest in the project if the project's cost is less than or equal to:

Answer 1

Answer:

$155,320

Explanation:

Given:

Cash inflow in the first year = $80,000

Cash inflow in the second year = $100,000

Present value of first year cash flow = Inflow × present value factor of one period

                                                            = $80,000 × 0.909

                                                            = $72,720

Present value of second year cash flow = Inflow × present value factor of two periods

                                                            = $100,000 × 0.826

                                                            = $82,600

Present value of investment = 72,720 + 82,600

                                               = $155,320

Wellman should invest in the project if project cost is less than or equal to present value of inflows that is $155,320