# CMA Study Group

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## Explanation required

• #### 1.  Explanation required

Posted 06-14-2022 08:20 AM
Hi,

Ben Manufacturing is analyzing a capital investment project that is forecasted to produce the following cash flows and net income.

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).

Can help in solving this in detail.

Regards,
Anupama D

• #### 2.  RE: Explanation required

Posted 06-15-2022 03:37 AM
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
India
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• #### 3.  RE: Explanation required

Posted 06-15-2022 11:51 PM
Year.     After Tax CF      PVF 12%        Cash Flow
0.                (20000).          1.00.             (20000)
1.                  6000.             0.893              5358
2.                  6000.             0.797.             4782
3.                  8000.             0.712.             5696
4.                  8000.             0.636.             5088
Total                                                             924

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NITIN WAGHELA
Accountant
Mumbai
India
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