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.
Year Net Cash Flows Present Value of 1 at 12% Present Value of Net Cash Flows
1
2
3
4
5
Totals
Amount invested
Net present value
b. Should Beyer accept the investment?
Yes
No

Answer 1

Answer:

a) Net Present Value = $ 304,495.12  

b) Beyer should accept the investment.

Explanation:

The net present value NPV) of a project is the present value of cash inflow less the present value of cash outflow of the project.

NPV = PV of cash inflow - PV of cash outflow

Year                                                     PV

1        77,000 × 1.12^(-1)       =  68,750.00  

2        54,000 × 1.12^(-2)    =  43,048.47  

3        82,000 ×  1.12^(-3)  =   58,365.98  

4      172,000 ×   1.12^(-4) =  109,309.11  

5       423,000 ×  1.12^(-5)=  240,021.56  

Total Present Value             519,495.12  

Initial cost                             (215,000)

Net Present Value                 304,495.12

Net Present Value = $ 304,495.12  

b) Decision :

Beyer should accept the investment. This will increase the wealth of the shareholders by $ 304,495.12