Answer = b: In order to arrive at cash flows, you may have to adjust for non-cash flow cost items such as depreciation.
You are about to invest $ 15,000 into a project that will generate $ 5,500 of cash flows each year for the next 3 years. If your cost of capital is 11%, then the present value of future cash flows is: (refer to Exhibit 2 for present value tables)
Answer = b. Multiply the $ 5,500 cash flows by the appropriate discount factors and sum the discounted cash flows:
Referring back to question 5, the Net Present Value of the project is:
Answer = c: The initial cash outflow is (15,000) offset by the total discounted cash flows of $ 13,442 per the previous question = (1,558).
You are considering investing in a new cotton-bailing machine. The purchase price of new bailer is $ 10,000. It will cost $ 750 to transport the bailer to your location. The old bailer will be sold for $ 2,000 and your tax rate is 40%. The net investment for this project is:
Answer = c: The total cost of the investment is $ 10,000 + $ 750 for transportation. This cost gets offset by a salvage value for the old asset which is $ 1,200 ($ 2,000 less $ 800 paid for taxes). Therefore, the net investment amount is $ 9,550 ($ 10,750 - $ 1,200).
In addition to using Net Present Value to evaluate a project, another good economic criteria that can be used is:
Accounting Rate of Return