UR Company is considering rebuilding and selling used alternators for automobiles. The company estimates that the net operating cash flows (sales minus cash operating expenses) arising from the rebuilding and sale of the used alternators would be as follows (numbers in parentheses indicate an outflow):
$\begin{array}{|l|r|}
\hline \text { Year } 1-10 & \$ 90,000 \
\hline \text { Year } 11 & (\$ 20,000) \
\hline \text { Year } 12 & \$ 100,000 \
\hline
\end{array}$
In addition to the above net operating cash flows, UR Company would purchase production equipment costing $\$ 200,000$ now to use in the rebuilding of the alternators. The equipment would have a 12 -year life and a $\$ 15,000$ salvage value. The company's discount rate is $10 \%$. (Ignore income taxes in this problem.)
- What is the present value of the net operating cash flows (sales minus cash operating expenses)arising from the rebuilding and sale of the alternators,rounded to the nearest dollar? (Do not round your intermediate calculations.)
A) $577,864.
B) $582,735.
C) $591,884.
D) $596,735.

Question

Quizplus · Accepted Answer

The correct answer is A. The present value of the net operating cash flows is $577,864. This is calculated as follows:PV = $\frac{90,000}{1.10^1} + \frac{90,000}{1.10^2} + \frac{90,000}{1.10^3} + \frac{90,000}{1.10^4} + \frac{90,000}{1.10^5} + \frac{90,000}{1.10^6} + \frac{90,000}{1.10^7} + \frac{90,000}{1.10^8} + \frac{90,000}{1.10^9} + \frac{90,000}{1.10^{10}} + \frac{-20,000}{1.10^{11}} + \frac{100,000}{1.10^{12}}$= $\frac{90,000}{1.10} + \frac{90,000}{1.21} + \frac{90,000}{1.331} + \frac{90,000}{1.4641} + \frac{90,000}{1.61051} + \frac{90,000}{1.771561} + \frac{90,000}{1.9487171} + \frac{90,000}{2.14358881} + \frac{90,000}{2.357947691} + \frac{90,000}{2.5937424601} + \frac{-20,000}{3.0585027321} + \frac{100,000}{3.3521630053}$= $\$577,863.99$

UR Company Is Considering Rebuilding and Selling Used Alternators for Automobiles