Paramount Moving Company is considering purchasing new equipment costing $700,000.The company's management has estimated that the equipment will generate cash flows as follows: Present value of $1:
The company's required rate of return is 9%.Using the factors in the table,calculate the present value of the cash flows.

Question

Paramount Moving Company is considering purchasing new equipment costing $700,000.The company's management has estimated that the equipment will generate cash flows as follows:  Present value of $1:
 The company's required rate of return is 9%.Using the factors in the table,calculate the present value of the cash flows.

Quizplus · Accepted Answer

Using the present value formula: 
PV = CF * (PVIFR%,n) 
where PV = present value, CF = cash flow, PVIFR%,n = present value factor for the given discount rate and number of periods.

The present value calculation for each year's cash flow is as follows: 
Year 1: $200,000 * 0.917 = $183,400 
Year 2: $250,000 * 0.842 = $210,500 
Year 3: $300,000 * 0.772 = $231,600 
Year 4: $200,000 * 0.708 = $141,600 
Year 5: $100,000 * 0.650 = $65,000

Adding up the present values of each cash flow: 
PV = $183,400 + $210,500 + $231,600 + $141,600 + $65,000 = $832,100

Therefore, the present value of the cash flows is closest to option B) $819,300.

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