Question

Stellan Manufacturing is considering the following two investment​ proposals: Proposal X Proposal Y Investment $ 720 comma 000 $ 512 comma 000 Useful life 5 years 4 years Estimated annual net cash inflows received at the end of each year $ 150 comma 000 $ 110 comma 000 Residual value $ 58 comma 000 ​$0 Depreciation method Straight Minusline Straight Minus Line Annual discount rate ​10% ​9% Present value of an ordinary annuity of​ $1: ​8% ​9% ​10% 1 0.926 0.917 0.909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 4 3.312 3.240 3.170 5 3.993 3.809 3.791 6 4.623 4.486 4.355 Compute the present value of the future cash inflows from Proposal Y.

Answer 1

Answer:

Present value of future cash inflows of Project Y = $110,000 X 3.240 = $356,400

Explanation:

Provided cost of Proposal Y = $512,000

Residual Value = $0

Depreciation will not be considered as we need to consider the present value of future cash flows, depreciation does not involve any cash flow.

Useful life = 4 years

Estimated cash inflow per year = $110,000

Discount rate = 9%

Present Value of an Ordinary Annuity = 3.240 @ 9% for 4 years

Thus present value of future cash inflows = $110,000 X 3.240 = $356,400

Note: Net Present Value = Present Value of Cash Inflows - Present Value of  Cash Outflow = $356,400 - $512,000 = -$155,600

Final Answer

Present value of future cash inflows of Project Y = $110,000 X 3.240 = $356,400