CMA Study Group

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  • 1.  Explanation required

    Posted 21 days ago
    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.

     

    YearAfter Tax Cash-FlowsNet  Income
    0$(20,000)$ 0
    16,0002,000
    26,0002,000
    38,0002,000
    48,0002,000
    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


  • 2.  RE: Explanation required

    Posted 20 days ago
    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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  • 3.  RE: Explanation required

    Posted 19 days ago
    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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