#12
Peng Company is considering an investment expected to generate an average net income after taxes of $2,900 for three years. The investment costs $51,600 and has an estimated $10,800 salvage value.
Assume Peng requires a 10% return on its investments. Compute the net present value of this investment. Assume the company uses straight-line depreciation
Homework Answers
Annual Cash Flow
| Profit after tax | Depreciation | Total Cash Inflows | Present value @ 10% | Present value | |
| 1 | 2900 | 13600 | 16500 | 0.909 | 14999 |
| 2 | 2900 | 13600 | 16500 | 0.826 | 13629 |
| 3 | 2900 | 13600 | 16500 | 0.751 | 12392 |
| 49500 | 41020 |
Residual Value Present Value
10800 x 0.751 = 8111
Total Cash Inflows = Annual Cash Flow + Residual Value
= 41020 + 8111
=49131
Total Cash Outflows = 51600
Net Present value = Total Cash Inflows - Total Cash Outflows
=49131 - 51600
=( 2469)
The Proposal should be rejected as Net Present value is negative
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#12
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