Asked by Emily Lutsock on Jun 30, 2024
Verified
Cha Li Lao Company wants to purchase equipment with a 3-year useful life which is expected to produce cash inflows of $15000 each year for two years and $9000 in year 3. Woods has a 14% cost of capital and uses the following factors. What is the present value of these future cash flows? Present Value of 1\text { Present Value of } 1 Present Value of 1
Period 14%1.882.773.67\begin{array}{cc}\text { Period } & 14 \% \\\hline 1 & {.88}\\2 & .77\\3&.67\end{array} Period 12314%.88.77.67
A) $26130
B) $30780
C) $30870
D) $34750
Cost of Capital
The minimum profit rate a company needs to achieve on its investment ventures to keep its market value stable and draw in capital.
Cash Inflows
Money received by a business from various sources including sales, investments, and financing.
Useful Life
The estimated period over which an asset is expected to be used by the entity, or be productive.
- Understand the concept and calculation of present value and its application in evaluating future cash flows.
Verified Answer
ZK
Zybrea KnightJul 04, 2024
Final Answer :
B
Explanation :
The present value of these future cash flows can be calculated by multiplying each year's cash inflow by the corresponding present value factor for a 14% cost of capital, then summing those values: 15000×.88+15000×.77+9000×.67=13200+11550+6030=30780.15000 \times .88 + 15000 \times .77 + 9000 \times .67 = 13200 + 11550 + 6030 = 30780.15000×.88+15000×.77+9000×.67=13200+11550+6030=30780.
Learning Objectives
- Understand the concept and calculation of present value and its application in evaluating future cash flows.