Question

Brett Collins is reviewing his company’s investment in a cement plant. The company paid $15,800,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company’s desired rate of return for present value computations is 10 percent. Expected and actual cash flows follow: (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

	Year 1			Year 2			Year 3			Year 4			Year 5
Expected	$	3,380,000		$	4,960,000		$	4,580,000		$	5,160,000		$	4,250,000
Actual		2,680,000			3,010,000			4,830,000			3,850,000			3,560,000

Required

1. a.&b. Compute the net present value of the expected and actual cash flows as of the beginning of the investment. (Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar.)

Answer 1

Answer)

Calculation of Net Present value (expected)

Net present value = Present value of net cash inflows – present value of cash outflow

                                  = $ 16,776,158 - $ 15,800,000

                                  = $ 976,158

Therefore the net present value of (expected) is $ 976,158.

Working note:

Calculation of present value of expected cash inflows:

Year	Net cash inflows	Present value factor at 10%	Present value (In $)
1	$3,380,000	0.90909	3,072,724
2	$4,960,000	0.82645	4,099,192
3	$4,580,000	0.75131	3,441,000
4	$5,160,000	0.68301	3,524,332
5	$4,250,000	0.62092	2,638,910
Total	16,776,158

Calculation of Net Present value (Actual)

Net present value = Present value of net cash inflows – present value of cash outflow

                                  = $ 13,392,867 - $ 15,800,000

                                  = - $ 2,407,133

Therefore the net present value (actual) is - $ 2,407,133.

Working note:

Calculation of present value of Actual cash inflows:

Year	Net cash inflows	Present value factor at 10%	Present value (In $)
1	$2,680,000	0.90909	2,436,361
2	$3,010,000	0.82645	2,487,615
3	$4,830,000	0.75131	3,628,827
4	$3,850,000	0.68301	2,629,589
5	$3,560,000	0.62092	2,210,475
Total	13,392,867