Question

Corporation ABC invested in a project that will generate $60,000 annual after-tax cash flow in years 0 and 1 and $40,000 annual after-tax cash flow in years 2, 3, and 4. Compute the NPV of these cash flows assuming that:

a. ABC uses a 10 percent discount rate.
b. ABC uses a 7 percent discount rate.
c. ABC uses a 4 percent discount rate.

Answer 1

Answer:

a. $204,940

b.$214,180

c. $224,480

Explanation:

a. Computation for the NPV of these cash flows assuming that ABC uses a 10 percent discount rate.

NPV= $60,000 + 0.909($60,000) + 0.826($40,000) + 0.751($40,000) + 0.683($40,000)

NPV=$60,000+$54,540+$33,040+$30,040+$27,320

NPV = $204,940

Therefore the NPV of these cash flows assuming that ABC uses a 10 percent discount rate is $204,940

b. Computation for the NPV of these cash flows assuming that ABC uses a 7 percent discount rate.

NPV=$60,000 + 0.935($60,000) + 0.873($40,000) + 0.816($40,000) + 0.763($40,000)

NPV=$60,000+$56,100+$34,920+$32,640+$30,520

NPV= $214,180

Therefore the NPV of these cash flows assuming that ABC uses a 7 percent discount rate is $214,180

c. Computation for the NPV of these cash flows

assuming that ABC uses a 4 percent discount rate.

NPV=$60,000 + 0.962($60,000) + 0.925($40,000) + 0.889($40,000) + 0.855($40,000)

NPV=$60,000+$57,720+$37,000+$35,560+$34,200

NPV= $224,480

Therefore the NPV of these cash flows

assuming that ABC uses a 4 percent discount rate is $224,480