Question

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Present Value of $ 1 at 12% for 8 years = 0.404 Present Value of an...

  1. Present Value of $ 1 at 12% for 8 years = 0.404

    Present Value of an annuity at 12% for 8 years = 4.968

    Future Value of $1 at 12% for 8 years = 2.476

    Future Value of an annuity at 12% for 8 years = 12.3

    Vargas Products is considering a capital project. Project A has net cash inflows of $56,000 annually for 8 years. What is the total amount they would be willing to invest if their expected return is 12%?

    a.

    $ 22,624
    b.

    180,992
    c.

    $278,208
    d.

    $448,000  

Solutions

Expert Solution

PV of net cash inflow = Annual cash inflow x PVIFA (i, n)

                                 = $ 56,000 x PVIFA (12 %, 8)

                                   = $ 56,000 x 4.968

                                    = $ 278,208

The expected return of Vargas Products is 12 %. Total present value of the project discounted with this rate is $ 278,208. So, Vargas Products can invest $ 278,208 for a project having 8 annual cash inflows of about $ 56,000.

Hence option “c. $ 278,208” is correct answer.

ekkarill92 answered 2 years ago
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