Question

In: Accounting

2. Project A will cost $100,000 and requires working capital of $20,000. Annual revenue of $21,000...

2. Project A will cost $100,000 and requires working capital of $20,000. Annual revenue of $21,000 and expenses of $5,000 for five years. In the fifth year there will be salvage value of $8,000.

Should the project be accepted with a discounted rate of 14%. Annuity rate 2.91371; Single factor rate .51937.

Solutions

Expert Solution

Answer:

Present value of cash out flows = 100,000+20,000

                                                         = $120,000

Present value of cash inflows:

Annual cash flows = Revenue-expenses

=21,000-5,000

=$16,000

And salvage value at 5th year end = $8,000

Present value of cash inflows =PVAF@14 at 5years*16,000+PAF@14% at 5th year*8,000

                                                     =3.43308*$16,000+0.51937*$8,000

                                                     = $59,088

Conclusion:

Project should not be Accepted because Present value of cash inflows are less than Present value of cash out flows

ekkarill92 answered 1 year ago
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