Question

A factory costs $420,000. You forecast that it will produce cash inflows of $100,000 in year 1, $160,000 in year 2, and $260,000 in year 3. The discount rate is 10%. a. Calculate the PV of cash inflows. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value $ b. Is the factory a good investment? Yes No

Answer 1

Answer:

$418,482.34

No

Explanation:

The present value of Cash flows can be found by discounting the cash flows at the discount rate.

The formula can be found by using the formula in the attached image.

The present value can be found using a financial calculator:

Cash flow in year 0 = $0

Cash flow in year 1 = $100,000

Cash flow in year 2 = $160,000

Cash flow in year 1 = $260,000

I = 0%

PV = $418,482.34

The investment is not a good investment because the present value of the cash flows is less than the cost of the investment. The cash flows from the investment would not he enough to recover the amount invested.

I hope my answer helps you.