A factory costs $290,000. You forecast that it will produce cash inflows of $85,000 in year 1, $145,000 in year 2, and $230,000 in year 3. The discount rate is 10%.
a. What is the value of the factory?
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The value of the factory can be calculated using the formula for the present value of future cash flows. The formula is:
PV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3
where:
PV = present value
CF = cash flow
r = discount rate
Substituting the given values into the formula, we get:
PV = $85,000 / (1 + 0.10)^1 + $145,000 / (1 + 0.10)^2 + $230,000 / (1 + 0.10)^3
Calculating the above expression, we get:
PV = $77,272.73 + $120,661.16 + $172,186.01
Adding these values together, we get:
PV = $370,119.90
Therefore, the value of the factory is $370,119.90.
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