Question

Brett Collins is reviewing his company’s investment in a cement plant. The company paid $15,300,000 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 discount rate for present value computations is 9 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	$	3,370,000		$	4,930,000		$	4,630,000		$	5,010,000		$	4,220,000
Actual		2,670,000			3,010,000			4,870,000			3,870,000			3,530,000

   

Required

a.&b. Compute the net present value of the expected and actual cash flows as of the beginning of the investment

Answer 1

	CALCULATION OF THE NET PRESENT VALUE OF THE EXPECTED CASH FLOW
	Years	Cash Flow (A)	PVF @ 9% (B)	Present Value (AXB)
	0	$    -1,53,00,000	1	$               -1,53,00,000
	1	$         33,70,000	0.9174	$                    30,91,743
	2	$         49,30,000	0.8417	$                    41,49,482
	3	$         46,30,000	0.7722	$                    35,75,210
	4	$         50,10,000	0.7084	$                    35,49,210
	5	$         42,20,000	0.6499	$                    27,42,710
		TOTAL		$                    18,08,356
	CALCULATION OF THE NET PRESENT VALUE OF THE ACTUAL CASH FLOW
	Years	Cash Flow (A)	PVF @ 9% (B)	Present Value (AXB)
	0	$    -1,53,00,000	1	$               -1,53,00,000
	1	$         26,70,000	0.9174	$                    24,49,541
	2	$         30,10,000	0.8417	$                    25,33,457
	3	$         48,70,000	0.7722	$                    37,60,534
	4	$         38,70,000	0.7084	$                    27,41,606
	5	$         35,30,000	0.6499	$                    22,94,258
		TOTAL		$                  -15,20,605