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16 September, 00:05

Brief Exercise 24-2 Hsung Company accumulates the following data concerning a proposed capital investment: cash cost $216,758, net annual cash flows $43,900, and present value factor of cash inflows for 10 years 5.22 (rounded). (If the net present value is negative, use either a negative sign preceding the number eg - 45 or parentheses eg (45).) Determine the net present value, and indicate whether the investment should be made.

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  1. 16 September, 00:59
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    Net Present Value = $12,400

    Since net present value is positive, the investment shall be made.

    Explanation:

    Capital outlay = $216,758

    Cash inflow every year = $43,900

    Period = 10 Years

    Net Present Value = Present value of cash inflow - Present value of cash outflow

    Present Value of Cash Inflow = Cash inflow each year X Present value factor of cash inflows for years

    = $43,900 X 5.22

    = $229,158

    Present value of cash outflow = $216,758

    Net Present Value = $229,158 - $216,758 = $12,400

    Since net present value is positive, the investment shall be made.

    Net Present Value measures the net effect of an investment discounted at current rate of interest, i. e. cost of capital.

    Final Answer

    Net Present Value = $12,400

    Since net present value is positive, the investment shall be made.
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