Answer:
C. $358,455
Explanation:
As per given data
B14 Model F54 Model
Investment $320,000 $240,000
Useful life (years) 8 8
Estimated annual net cash inflows $75,000 $40,000
Residual value $30,000 $10,000
Depreciation method Straight-line Straight-line
Required rate of return 14% 10%
Net Present value of the net cash inflows can be calculated by using the formula of present value of annuity because the cash inflows of each year are constant cash flows.
Present value of Annuity = P x [ ( 1 - ( 1 + r )^-n ) / r ]
Where
P = Annual cash inflows = $75,000
r = required rate of return = 14%
n = numbers of periods = 8 years
Placing values in the formula
Present value of cash inflows = $75,000 x [ ( 1 - ( 1 + 14% )^-8 ) / 14% ]
Present value of cash inflows = $347,915
Present value of residual value of asset can be calculated by discounting the residual value using required rate of return.
Formula for Discounting
Present value = P (1 + r)^-n
Where
P = Value to be discounted = $30,000
r = required rate of return = 14%
n - numbers of periods = 8 years
Placing values in the formula
Present value of residual value = $30,000 x ( 1 + 14% )^-8 = $10,517
Total Present value = $10,517 + 347,915 = 358,432
There is a difference due to the rounding effect in the calculations, the closest value id C. $358,455
