Question

Beyer Company is considering the purchase of an asset for $185,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Assume that Beyer requires a 12% return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Year 1 Year 2 Year 3 Year 4 Year 5 Total Net cash flows $ 87,000 $ 46,000 $ 72,000 $ 132,000 $ 41,000 $ 378,000 a. Compute the net present value of this investment. b. Should Beyer accept the investment

Answer 1

Answer:

a. $87,750.56

b. Accept the investment, because it gives a positive net present value.

Explanation:

the net present value is the today`s value of future cash flows. We determine the net present value by discounting the future cash flow using the required return or the cost of capital.

Using a Financial calculator this can be determined as :

- $185,000 CF0

$ 87,000    CF 1

$ 46,000    CF 2

$ 72,000    CF 3

$ 132,000   CF 4

$ 41,000     CF 5

i/yr = 12%

Then, SHIFT NPV gives $87,750.56

We accept an investment only and only if it has a positive net present value.