Investment of $100M
returns $40M/yr for 3 years when it is sold for $50M. Discount rate 5%. The net discounted cash flow ($1,000/yr)
is closest to?
This is a painfully easy problem. IF you know is that NCF leaves off the initial cost of the item AND it still includes the discounted salvage value. That's the whole ball game.
40(1.05)^-1 + 40(1.05)^-2 + 40(1.05)^-3 +50(1.05)^-3 =
$38.1 + $36.3 + $34.6 + 43.2 = $152 (all values M) or (A).
The 2016 key says the answer is (B) 52. I am assuming this is an error in the answer key and the correct answer is (A) 152?
ReplyDeleteYikes, that must be a typo. Let me check out Amazon Kindle and see what happened. Thanks for the alert.
DeleteHi, David. Thanks for helping in exam preparation. I have a questions: why do you use present value that has unit [$] in the solution and get annual cash flow in unit [$ / year]? In this case don't need we convert everything in annual rate? Also, why do you ignore investment $100000 when net cash flow is cash in minus cash out? Thanks.
ReplyDelete