Question

Beyer Company is considering the purchase of an asset for $215,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Assume that Beyer requires a 12% return on its investments. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Year 1 Year 2 Year 3 Year 4 Year 5 Total
Net cash flows $77,000 $ 54,000 $ 82,000 $ 172,000 $ 38,000 $ 423,000
a. Compute the net present value of this investment.
b. Should Beyer accept the investment?

Answer 1

Answer:

a) Net present value of investment = $86,036

b) Since the Net present value is positive thus, Beyer should accept the investment

Explanation:

Data provided in the question:

Cost of the asset = $215,000

Rate of return = 12% = 0.12

Now,

Present Value of Net Cash Flows = Net cash flow × Present value factor

also,

Present value factor = (1 + rate)⁻ⁿ

here,

n is the year

thus,

Year 1             Net cash flows        Present value factor          Present value

  1                      77,000                      0.89286                             68,750

  2                      54,000                     0.79719                              43,048

  3                      82,000                     0.71178                                58,366

  4                      172,000                    0.63552                             109,309

  5                      38,000                     0.56743                              21,562

Total                  423,000                                                              301,036

a) Net present value of investment = Total present value - Amount invested

= 301,036 - 215,000

= $86,036

b) Since the Net present value is positive thus, Beyer should accept the investment