Brett Collins is reviewing his company’s investment in a cement plant. The company paid $15,600,000 five...

Brett Collins is reviewing his company’s investment in a cement plant. The company paid $15,600,000 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 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	$	3,310,000	$	4,970,000	$	4,560,000	$	5,050,000	$	4,240,000
Actual		2,660,000		3,000,000		4,920,000		3,810,000		3,580,000

Required

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.)

Expert Solution

Answer-a)-

BRETT COLLINS
Calculation of Net Present Value of Expected cash flows

Year	Net Cash Flows (a)	Present Value of 1 at 9% (b)	Present Value of cash flows (c=a*b)

Year 1	3310000	0.917	3035270

Year 2	4970000	0.842	4184740

Year 3	4560000	0.772	3520320

Year 4	5050000	0.708	3575400

Year 5	4240000	0.650	2756000
Totals
Total present value of cash inflow (a)			17071730
Total cash outflow (b)			15600000

Net Present Value (c=a-b)			1471730

b)-

BRETT COLLINS
Calculation of Net Present Value of Actual cash flows

Year	Net Cash Flows (a)	Present Value of 1 at 9% (b)	Present Value of cash flows (c=a*b)

Year 1	2660000	0.917	2439220

Year 2	3000000	0.842	2526000

Year 3	4920000	0.772	3798240

Year 4	3810000	0.708	2697480

Year 5	3580000	0.650	2327000
Totals
Total present value of cash inflow (a)			13787940
Total cash outflow (b)			15600000

Net Present Value (c=a-b)			-1812060

ekkarill92 answered 1 year ago

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