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  • 1.  Explanation required

    Posted 06-14-2022 08:20 AM
    Hi,

    Please help me understand this.

    Ben Manufacturing is analyzing a capital investment project that is forecasted to produce the following cash flows and net income.

     

    YearAfter Tax Cash-FlowsNet  Income
    0$(20,000)$ 0
    16,0002,000
    26,0002,000
    38,0002,000
    48,0002,000
    If Foster's cost of capital is 12%, the net present value (NPV) for this project is:

    A. $6,074.
    B. $924.
    C. $6,998.
    D. $(1,600).

    The answer is B.

    Can help in solving this in detail.

    Regards,
    Anupama D


  • 2.  RE: Explanation required

    Posted 06-15-2022 03:37 AM
    Hi, 

    See in capital budgeting we need to Consider only the cash flow aspect and not the income aspect.

    Now here the coc is 12%. So
    The PVf of 12% for 4 yrs will be
    (1 / 1+r)^n

    So for yr 1 = (1/1.12)^ 1 = 0.893 *6000
    Yr 2 = 0.797 *6000
    Yr3 = 0.712 *8000
    Yr 4= 0.636 *8000

    So NPV = PVCIF - PVCOF
     ie, Npv = 20924 - 20000 =$ 924



    ------------------------------
    VIMAL RAJ CHAKKINGAL
    Student
    PALAKKAD
    India
    ------------------------------



  • 3.  RE: Explanation required

    Posted 06-15-2022 11:51 PM
    Year.     After Tax CF      PVF 12%        Cash Flow 
    0.                (20000).          1.00.             (20000)
    1.                  6000.             0.893              5358         
    2.                  6000.             0.797.             4782
    3.                  8000.             0.712.             5696
    4.                  8000.             0.636.             5088
    Total                                                             924


    ------------------------------
    NITIN WAGHELA
    Accountant
    Mumbai
    India
    ------------------------------



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