A factory costs $270,000. You forecast that it will produce cash inflows of $75,000 in year 1, $135,000 in year 2, and $210,000 in year 3. The discount rate is 11%.

A factory costs $270,000. You forecast that it will produce cash inflows of $75,000 in year 1, $135,000 in year 2, and $210,000 in year 3. The discount rate is 11%.

a. What is the value of the factory?


b. Is the factory a good investment?
Answer
Yes

Explanation

Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations.

a.

PV	=	C1 / (1 + r)1 + C2 / (1 + r)2 + C3 / (1 + r)3
	=	$75,000 / 1.11 + $135,000 / 1.112 + $210,000 / 1.113
	=	$330,686.79

Value of factory	=	PV of cash inflows – Cost
	=	$330,686.79 – 270,000
	=	$60,686.79

b.
Since the PV of the cash inflows exceeds the cost, the factory is a good investment.

Calculator computations:

CF0	=	–270,000
CO1	=	75,000  FO1 = 1
CO2	=	135,000  FO2 = 1
CO3	=	210,000  FO3 = 1

I = 11
CPT NPV = 60,686.79