Net Present Value and Salvage Value
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For the questions below, I need to know
i) When to multiply the net cash flows by the present value. For example do I do 160000*0.8929 and then 130000*0.7972 and so on, or do I multiply the net values only by 160000?
ii) Do I multiply the salvage value of 45000* by the fifth year of the present value, add it to the total net present value and then subtract my answer to 360000 to get the present value?
Questions:
Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:
Year 1 | $160,000
Year 2 | 130,000
Year 3 | 100,000
Year 4 | 55,000
Year 5 | 40,000
Total: $485,000
Atlantic Company's required rate of return is 12%.
1. Calculate the net present value of the investment. Show how you arrived at your answer.
2. Does the net present value that you calculated indicate a return equal to, higher than, or lower than 12%?
A) Equal to 12%
B) Higher than 12%
C) Lower than 12%
D) Cannot be determined from the given data
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1) You have to do the net cash flows by present value. This will be: 160000*.8929 ...
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