Question

Kingbird Co. purchased some equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $(1100). Annual cost savings were: $12000 for year 1; 10000 for year 2; and $9000 for year 3. The amount of the initial investment was Present Value PV of an Annuity Year of 1 at 12% of 1 at 12% 1 0.893 0.893 2 0.797 1.690 3 0.712 2.402

Answer 1

Answer:

Initial investment = $36,092

Explanation:

This question requires the calculation of the year 0 cash-flow using the given information. Please note, in the calculation of Net Present Value, if the cash-flows from year 1 to year n are not the same, then we use the Present value factors as the stream of cash-flows is not an annuity.

year  Cashflow PV factor of $1 at 12% PV (cashflow*PVF)

0            -??????               1.000                          -????  

1             12,000               0.893                        10,714  

2             10,000              0.797                        7,972  

3             9,000                0.712                        6,406  

   Net Present Value         (11,000)

The year 0 figure is thus equal to $-11,000-6,406-7,942-10,714=-36,092$

Therefore the initial investment was $36,092, which was a cash-outflow at year 0.