Anna Taylor buys a machine for her business.The machine costs $150,000.Anna estimates that the machine can produce $40,000 cash inflow per year for the next five years.Her cost of capital is 12 percent.What is the approximate present value of the future cash flow for Anna?

Question

Quizplus · Accepted Answer

To calculate the present value of the cash inflows, we need to use the formula: 
PV = CF / (1 + r) ^ n
Where:
PV = Present value
CF = Cash flow
r = Discount rate or cost of capital
n = number of years

Using the given values, we can calculate the present value of each cash inflow as follows:

PV of Year 1 cash inflow = $40,000 / (1 + 0.12) ^ 1 = $35,714.29
PV of Year 2 cash inflow = $40,000 / (1 + 0.12) ^ 2 = $31,925.05
PV of Year 3 cash inflow = $40,000 / (1 + 0.12) ^ 3 = $28,489.31
PV of Year 4 cash inflow = $40,000 / (1 + 0.12) ^ 4 = $25,382.60
PV of Year 5 cash inflow = $40,000 / (1 + 0.12) ^ 5 = $22,583.51

To find the present value of all cash inflows, we need to add up the present value of each cash inflow:

PV of all cash inflows = $35,714.29 + $31,925.05 + $28,489.31 + $25,382.60 + $22,583.51 = $144,194.76

Therefore, the approximate present value of the future cash flow for Anna is $144,192 (rounded to the nearest dollar). The best choice is B.

Anna Taylor Buys a Machine for Her Business