Hi,
See in capital budgeting we need to Consider only the cash flow aspect and not the income aspect.
Now here the coc is 12%. So
The PVf of 12% for 4 yrs will be
(1 / 1+r)^n
So for yr 1 = (1/1.12)^ 1 = 0.893 *6000
Yr 2 = 0.797 *6000
Yr3 = 0.712 *8000
Yr 4= 0.636 *8000
So NPV = PVCIF - PVCOF
ie, Npv = 20924 - 20000 =$ 924
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VIMAL RAJ CHAKKINGAL
Student
PALAKKAD
India
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Original Message:
Sent: 06-14-2022 08:20 AM
From: Anupama D
Subject: Explanation required
Hi,
Please help me understand this.
Ben Manufacturing is analyzing a capital investment project that is forecasted to produce the following cash flows and net income.
| Year | After Tax Cash-Flows | Net Income |
| 0 | $(20,000) | $ 0 |
| 1 | 6,000 | 2,000 |
| 2 | 6,000 | 2,000 |
| 3 | 8,000 | 2,000 |
| 4 | 8,000 | 2,000 |
If Foster's cost of capital is 12%, the net present value (NPV) for this project is:
A. $6,074.
B. $924.
C. $6,998.
D. $(1,600).
The answer is B.
Can help in solving this in detail.
Regards,
Anupama D