## Answers

Effective cash flow = Income after tax + Depreciation |

Formula of Cumulative Discounting Factor = (1-(1+r)^-t)/r |

where. |

r = rate of interest |

t= time period |

PV = CF * (1-(1+r)^-t)/r |

where. |

PV = Present Value of future cash flows |

CF = Annual Cash flow |

r = rate of interest |

t= time period( no. of years) |

Formula of Discounting Factor for a particular year = (1+r)^t |

where. |

r = rate of interest |

t= time period ( year) |

PV = CF / (1+r)^t |

PV = Present Value of future cash flows |

CF = Cash flow |

r = rate of interest |

t= time period(year) |

a. | ||||||

Cash Flow | Select Chart | Amount | X | PV Factor | = | Present Value |

Annual Cash Flow | PVA of $ 1 | $381,433 | 4.355261 | $1,661,240 | ||

Residual Value | PV of $ 1 | $11,400 | 1.771561 | $6,435 | ||

Total Present Value of Future Cash Inflows | $1,667,675 | |||||

Initial Cash Outflow | ($530,000) | |||||

Net Present Value | $1,137,675 |

Working Notes | |||||

Given values | |||||

Cost of Machine = $ 530,000 | |||||

Annual Cash Inflow = $ 295,000 | |||||

Salvage Value of Asset = $ 11,400 | |||||

Rate of discounting = 10% | |||||

Useful life of asset = 6 years | |||||

After tax Cash flow = Income after tax + Depreciation | |||||

Depreciation charged is on straight line basis | |||||

Computation of Depreciation | |||||

= (Cost of Asset - Salvage Value)/Useful life of asset | |||||

=( $ 530,000 - $ 11.400)/6 | |||||

= $ 518,600/6 | |||||

= $ 86,433 | |||||

Total Yearly Cash Flow = $ 295,000 + $ 86,433 | |||||

= $ 381,433 | |||||

Cash Flow from salvage value in the sixth year = $ 11,400 | |||||

Amount | PV Factor | PV of CF | |||

Annual Cash Flow | $381,433 | 4.355261 | $1,661,240 | ||

Residual Cash Flow | $11,400 | 1.771561 | $6,435 | ||

Total Cash Flow | $1,667,675 |

b. | ||||||

Cash Flow | Select Chart | Amount | X | PV Factor | = | Present Value |

Annual Cash Flow | PVA of $ 1 | $131,525 | 5.334926 | $701,676 | ||

Residual Value | PV of $ 1 | $33,800 | 2.143589 | $15,768 | ||

Total Present Value of Future Cash Inflows | $717,444 | |||||

Initial Cash Outflow | ($510,000) | |||||

Net Present Value | $207,444 |

Working Notes | |||||

Given values | |||||

Cost of Machine = $ 510,000 | |||||

Annual Cash Inflow = $ 72,000 | |||||

Salvage Value of Asset = $ 33,800 | |||||

Rate of discounting = 10% | |||||

Useful life of asset = 8 years | |||||

After tax Cash flow = Income after tax + Depreciation | |||||

Depreciation charged is on straight line basis | |||||

Computation of Depreciation | |||||

= (Cost of Asset - Salvage Value)/Useful life of asset | |||||

=( $ 510,000 - $ 33800)/8 | |||||

= $ 476,200/8 | |||||

= $ 59,525 | |||||

Total Yearly Cash Flow = $ 72,000 + $ 59,525 | |||||

= $ 131,525 | |||||

Cash Flow from salvage value in the sixth year = $ 33,800 | |||||

Amount | PV Factor | PV of CF | |||

Annual Cash Flow | $131,525 | 5.334926 | $701,676 | ||

Residual Cash Flow | $33,800 | 2.143589 | $15,768 | ||

Total Cash Flow | $717,444 |

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