Brett Collins is reviewing his company\'s investment in a cement plant. The comp
ID: 2520270 • Letter: B
Question
Brett Collins is reviewing his company's investment in a cement plant. The company paid $15,700,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether the plant has met original expectations before he decides its fate. The company's discount rate for present value computations is 9 percent. Expected and actual cash flows follow: (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Year 4 Year 5 Year 3 $3,370,000 $5,060,000 $4,560,000 $5,060,000 $4,210,000 2,690,000 2,990,000 4,890,000 3,880,000 3,590,000 Year 1 Year 2 Expected Actual Required a.&b.; Compute the net present value of the expected and actual cash flows as of the beginning of the investment. (Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answer to the nearest whole dollar.) Net present value (expected) Net present value (actual)Explanation / Answer
Answer = a) CALCULATION OF THE PRESENT VALUE OF THE EXPECTED CASH FLOW years Cash Flow PVF @ 9% Present Value 0 $ -1,57,00,000 $ 1.0000 $ -1,57,00,000.00 1 $ 33,70,000 $ 0.9174 $ 30,91,743.12 2 $ 50,60,000 $ 0.8417 $ 42,58,900.77 3 $ 45,60,000 $ 0.7722 $ 35,21,156.67 4 $ 50,60,000 $ 0.7084 $ 35,84,631.57 5 $ 42,10,000 $ 0.6499 $ 27,36,211.14 Total $ 14,92,643.26 Present Value of the expected Cash Flow $ 14,92,643 Answer = b) CALCULATION OF THE PRESENT VALUE OF THE ACTUAL CASH FLOW years Cash Flow PVF @ 9% Present Value 0 $ -1,57,00,000 $ 1.0000 $ -1,57,00,000.00 1 $ 26,90,000 $ 0.9174 $ 24,67,889.91 2 $ 29,90,000 $ 0.8417 $ 25,16,623.18 3 $ 48,90,000 $ 0.7722 $ 37,75,977.22 4 $ 38,80,000 $ 0.7084 $ 27,48,689.82 5 $ 35,90,000 $ 0.6499 $ 23,33,253.68 Total $ -18,57,566.20 Present Value of the Actual Cash Flow $ -18,57,566