Ignore income taxes in this problem.) The Becker Company is interested in buying
ID: 2390127 • Letter: I
Question
Ignore income taxes in this problem.) The Becker Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment:
Cost of required equipment....... $250,000
Working capital required........... $100,000
Annual operating cash inflows....$ 80,000
Cash repair at end of 4 years.... $40,000
Salvage value at end of 6 years... $90,000
This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for use elsewhere. The company's discount rate is 10%.
The present value of the net cash flows (all cash inflows less all cash outflows) occurring during year 4 is:
Answer
A.$40,000
B.$27,320
C.$54,640
D.$42,790
Explanation / Answer
Cash Flows Year 0 =-$250,000 -$100,000 =-$350,000 Year 1-3 = $ 80,000 Year 4 = $ 80,000 -$40,000 =$40,000 Year 5 = $ 80,000 Year 6 = $ 80,000 + $ 90,000 +$100,000 =270,000 Present value of the net cash flows occurring during year 4 is =$40,000/1.1^4 =27,320.53821 Answer B.$27,320