Question

DON Corp. is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for five years. At the end of five years, the machine can be sold to realize after-tax cash flows of $5,000. Interest is 12%. Assume the cash flows occur at the end of each year.

Required:
Calculate the total present value of the cash savings.

Answer 1

Answer:

$74,932.66

Explanation:

Present value is the sum of discounted cash flows.

Present value can be calculated using a financial calculator

Cash flow from year 1 to 4 = $20,000

Cash flow in year 5 = $25,000

I = 12%

Present value = $74,932.66

To find the PV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

I hope my answer helps you

Answer 2

The total present value of the cash savings is $74,932.75

Present value helps to determine the worth of money that will produce a particular amount in the future.

• The formulae to determine the total present value of the cash savings is (PVAF at 12%, 5 * Cash savings) + (PVF at 12%,5 * After tax sale value)

Total present value of cash savings =(3.60478 * $20,000) + (0.56743 * $5,000)

Total present value of cash savings = $72,095.6 + $2,837.15

Total present value of cash savings = $74,932.75

Therefore, the total present value of the cash savings is $74,932.75.

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