A cattleman is considering buying a herd of young cows for $50,000. The cattleman estimates he...
A cattleman is considering buying a herd of young cows for $50,000. The cattleman estimates he would keep the cows for six more years and then sell them for a salvage value of $30,000. Annual cash revenues will be $20,000 for each of the six years. Cash expenses will be $10,000 per year. Therefore, net annual cash flows are $10,000 annually for six years. At a discount rate of 12%, what is the net present value of this investment?
|
$6,313 |
||
|
-$50,000 |
||
|
$56,313 |
||
|
-$6,313 |
Homework Answers
Correct answer is option A.$6313
Calculation of NPV
NPV = Present value of all cash flows - Initial Investment
=10,000*PVIFA@12%,6 + 30,000*PVIF@12%,6 -50,000
=10,000*4.1115 +30,000*.5066 -50,000
=41,115+15,198-50,000
=6313
NOTE
-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is Discount rate and “n” is the useful life of investment
-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is Discount rate and “n” is the useful life of investment
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