Lloy\'s moving company is considering purchasing a new equipment that costs$728,
ID: 2493499 • Letter: L
Question
Lloy's moving company is considering purchasing a new equipment that costs$728,000. Its management estimates that equpment will generate cash as follows:
year 1 $214,000
year 2 $214,000
year 3 $264,000
year 4 $264,000
year 5 $150,000
Present value of $1:
6% 7% 8% 9% 10%
10.9430.9350.9260.9170.90920.
8900.8730.8570.8420.82630.8400.
8160.7940.7720.75140.7920.7630.
7350.7080.68350.7470.7130.6810.6500.621
The company's annual required rate of return is 9%. Using the factors in the table, calculate the present value of the cash flows. (round all calculations to the nearest whole dollar.
A $894,000
B $853,320
C $892,000
D $864,646
Explanation / Answer
Present value of the cash flows = Sum of (Cash flows * Discounting factor @9%)
Year
Cash Flow (in $)
Discounting factor@9%
Discounted cash flow
1
214,000
0.9170
196,238
2
214,000
0.8420
180,188
3
264,000
0.7720
203,808
4
264,000
0.7080
186,912
5
150,000
0.6500
97,500
Present value of Cash Flows
864,646
Year
Cash Flow (in $)
Discounting factor@9%
Discounted cash flow
1
214,000
0.9170
196,238
2
214,000
0.8420
180,188
3
264,000
0.7720
203,808
4
264,000
0.7080
186,912
5
150,000
0.6500
97,500
Present value of Cash Flows
864,646
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