Paramount Moving Company is considering purchasing new equipment costing $700,000.The management has estimated that the equipment will generate cash flows as follows: Present value of $1:
The company's required rate of return is 8%.Using the factors in the table,calculate the present value of the cash inflows.(Round all calculations to the nearest whole dollar.)

Question

Paramount Moving Company is considering purchasing new equipment costing $700,000.The management has estimated that the equipment will generate cash flows as follows:  Present value of $1:
 The company's required rate of return is 8%.Using the factors in the table,calculate the present value of the cash inflows.(Round all calculations to the nearest whole dollar.)

Quizplus · Accepted Answer

To calculate the present value of cash inflows, we need to use the present value of $1 table. 
Year 1 cash inflow = $150,000 x 0.926 = $138,900 
Year 2 cash inflow = $220,000 x 0.857 = $188,740 
Year 3 cash inflow = $280,000 x 0.794 = $222,320 
Year 4 cash inflow = $200,000 x 0.735 = $147,000 
Year 5 cash inflow = $180,000 x 0.681 = $122,580 
Total present value of cash inflows = $820,540 
As the present value of cash inflows is greater than the cost of equipment ($700,000), the investment will generate a positive net present value and would be a worthwhile investment. The closest answer is D, which is $841,000, but that may be a typo because the total present value should be $820,540.

Paramount Moving Company Is Considering Purchasing New Equipment Costing $700,000