Question

1. Peng Company is considering an investment expected to generate an average net income after taxes of $2,000 for three years. The investment costs $45,300 and has an estimated $7,500 salvage value. Assume Peng requires a 10% return on its investments. Compute the net present value of this investment. Assume the company uses straight-line depreciation. (PV of $1, FV of $1, PVA of $1, and FVA of $1)

	Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow Present Value of an Annuity of 1 = $0 Residual value Present Value of 1 = 0 Net present value

2. A company is considering investing in a new machine that requires a cash payment of $61,949 today. The machine will generate annual cash flows of $24,911 for the next three years.

What is the internal rate of return if the company buys this machine?

	Amount Invested 0 Annual Net Cash Flow = Present Value Factor = 0 Internal Rate of Return

3. A company is investing in a solar panel system to reduce its electricity costs. The system requires a cash payment of $111,174.60 today. The system is expected to generate net cash flows of $9,539 per year for the next 35 years. The investment has zero salvage value.The company requires an 7% return on its investments.

3-a. Compute the net present value of this investment.

	Chart Values are Based on: n = i = 7% Cash Flow Select Chart Amount x PV Factor = Present Value Annual cash flow = $0.00 Net present value

3-b. Should the project be accepted?

Answer 1

Question-1

Cash Flow	Select Chart	Amount	PV Factor	Present Value
Annual cash flow	Present Value of an Annuity of 1	$14,600	2.48685	$36,308.04
Residual value	Present Value of 1	$7,500	0.75131	$5,634.86
	Present value of cash inflows			$41,942.90
	Immediate cash outflows			$45,300
	Net present value			-$3,357.10 (Negative NPV)

Annual cash flow

Annual cash flow = After tax net income + Straight Line Depreciation

= $2,000 + [($45,300 – 7,500) / 3 Years]

= $2,000 + 12,600

= $14,600

Question-2

Amount Invested	Annual Net Cash Flow	Present Value Factor
$61,949	$24,911	2.48681
Internal Rate of Return		10%

Internal Rate of Return Factor = Net Initial Investment / Annual Cash Flow

= $61,949 / 24,911

= 2.48681

From the Present Value Annuity Factor Table, we can find that the discount rate (IRR) corresponding to the factor of 2.48681 for 3 Years is 10%

“Internal Rate of Return (IRR) for the Project = 10%”

Question-3(a)

Chart Values are based on
	N =	35 Years
	I =	7%
Cash Flow	Select Chart	Amount	PV Factor	Present Value
Annual cash flow	Present Value of an Annuity of 1	$9,539	12.94767	$1,23,507.85
Less: Cash Outflow				$ 1,11,174.60
Net present value				$12,333.25

Question-3(b)

YES. The Project should be accepted, Since the Project has the Positive NPV of $12,333.25