Sundquist Company invested in an asset with a useful life of 4 years. The compan

Question

Sundquist Company invested in an asset with a useful life of 4 years. The company's required rate of return is 12% for this class of asset. The net cash flows and present value factors for 4 years are as follows: Period Net Cash Flows from Asset Present Value of an Annuity of $1 at 12% 1 $ 8,000 0.9091 2 $ 8,800 0.8264 3 $ 9,600 0.7513 4 $10,400 0.6830 If the asset generates a positive net present value of $2,000, what was the amount of the original investment?

a.$7,273

b.$26,861

c.$28,861

d.$30,861

Explanation / Answer

Original Investment = Present value of cash inflows - NPV

= 28860.80-2000 i.e 26861

Particulars Year Cash Flows PVF @ 12% PV Cash Inflows 1 8000 0.9091 7272.8 Cash Inflows 2 8800 0.8264 7272.32 Cash Inflows 3 9600 0.7513 7212.48 Cash Inflows 4 10400 0.683 7103.2 Present Value 28860.8

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