Following is information on an investment considered by Hudson Co. The investmen
ID: 2438270 • Letter: F
Question
Following is information on an investment considered by Hudson Co. The investment has zero salvage value. The company requires a 6% return from its investments.
Compute this investment’s net present value. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round all present value factors to 4 decimal places.)
Compute this investment’s net present value. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round all present value factors to 4 decimal places.)
Explanation / Answer
The NPV of an investment = Present value of cash inflows - Present value of cash outflows
Here,
Cash inflows includes future economic benefits that an investment can generate.
Cash outflows includes initial investment and other expenses like maintenance expenses etc.
Calculation of the Net Present Value (NPV) of the investment:
Cash flow
(a)
Present value of 1 at 6%
(or)
Present value factor
(b)
Present value
(a) x (b)
Amount Invested (Cash outflow)
[at Year 1 beginning)
Note:
Present Value Factors can be calculated by using the following formula:
Present value factor = [1 ÷ (1 + r)n]
Where,
r = Rate of interest or Discounting interest
n = Number of periods
Calculation of present value factor:
Year 1 --->Present value of $1 at 6% = [1 ÷ (1 + 6%)1] = [1 ÷ (1 + 0.06)1] = $0.9433
Year 2 ---->Present value of $1 at 6% = [1 ÷ 1 + 6%)2] = [1 ÷ (1 + 0.06)2] = $0.8899
Year 3 ---->Present value of $1 at 6% = [1 ÷ 1 + 6%)3] = [1 ÷ (1 + 0.06)3] = $0.8396
Conclusion:
Since Net Present Value of the investment is negative, it is advisable to not to consider the investment.
Cash flow
(a)
Present value of 1 at 6%
(or)
Present value factor
(b)
Present value
(a) x (b)
Year 1 $150,000 0.9433 $141,495 Year 2 $146,000 0.8899 $129,925.4 Year 3 $101,000 0.8396 $84,799.6 Totals $397,000 $356,220Amount Invested (Cash outflow)
[at Year 1 beginning)
$360,000 $1 ($360,000) Net present value (3,780)