Firefox Company is considering the following investment proposal: Initial invest
ID: 2586612 • Letter: F
Question
Firefox Company is considering the following investment proposal:
Initial investment:
Depreciable assets (straight-line)
$36,000
Working capital
4,000
Operations (per year for 4 years):
Cash receipts
$25,000
Cash expenditures
11,000
Disinvestment:
Salvage value of equipment
$ 3,000
Recovery of working capital
4,000
Discount rate:
10 percent
Additional information for interest rate of 10 percent and four time periods:
Present value of $1
0.68301
Present value of an annuity of $1
3.16987
What is the net present value for the investment?
Select one:
A. $18,322
B. $ 4,781
C. $ 9,159
D. $44,378
Initial investment:
Explanation / Answer
Cash inflows each year for 4 years = Cash receipts - Cash expenditures
= 25,000 - 11,000
= 14,000
Cash inflows in the 4th year = Salvage value of equipment + Recovery of working capital
= 3,000 + 4,000
= 7,000
Present value of cash inflows = (14,000*3.16987) + (7,000*0.68301)
= 44,378.18 + 4,781.07
= 49,159.25
Cash outflows = Depreciable assets + Working capital
= 36,000 + 4,000
= 40,000
Present value of cash outflows = 40,000*1 = 40,000
Net present value = Present value of cash inflows - Present value of cash outflows
= 49,159.25 - 40,000
= 9,159.25
The answer is C.
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