I’m looking at Reading 28, #1, page 73 I just spend 45 minutes on this question and I can’t figure out how on earth the NPV is computed to be $97,449. I did it the short way using the CF key on my calculator and came up with $6794 Then, I did it the long way, as they suggest in the answer (page A-2) and again, I came up with $6794. Summary: initial outlay: -533,000 CF: 146,000 TNOCF: 124,000 equipment will sold after 5 years cost of capital 10% Again, I did it the short way using the CF key on my calculator and came up with $6794 Could somebody…please…take a look at the question when they have a little time, and possibly explain how on earth they arrived at a NPV of $97,449. Kind Regards
CF0=-533 CF1=146 F1=4 CF2=270 F2=1 remember ATOCF + TNOCF = year 5 cash flow. now do npv calc with 10% you get 97.449
Thank you CP. The crazy thing is the answer does not say anything about combining ATOCF + TNOCF = year 5 cash flow, and neither does the schweser examples I looked at. However, when I combine the cf with tnocf, I arrive at the correct NPV. Thanks again.
CFA.Rhythm Wrote: ------------------------------------------------------- > The crazy thing is the answer does not say > anything about combining ATOCF + TNOCF = year 5 > cash flow, and neither does the schweser examples > I looked at. Not true.
Cost of acquiring and installing the machine = 460k Working capital requirement = 73k Therefore CF0 = - 533K OCF1 to OCF5 : (S-C-D)(1-T)+D, where D=460k/5 = 92k. Therefore CF = (265K-83K-92K)(0.6)+92K=146K Terminal cashflow = 73k+85k-0.4(85k-0)=124k CF0=-533K CF1=146K CF2=146K CF3=146K CF4=146K CF5=146K+124K=270K NPV = 97,449.11
Yes, that’s correct. I just wasn’t combining (CF5 + terminal CF).
CFA.Rhythm Wrote: ------------------------------------------------------- > Yes, that’s correct. > > I just wasn’t combining (CF5 + terminal CF). yep…you must add them together… PV(CF1 to CF5) + PV of temrinal cash flow alternatively.