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R plc is considering an investment of $1,100,000 in a new machine which is expected to have substantial cash inflows over the next five years.
The annual cash flows from this investment and their probability are shown below:
Annual cash flow ($)Probability
200,000 0.4
280,000 0.5
350,000 0.1
At the end of its five-year life, the asset is expected to sell for $100,000. The cost of capital is 5%.
What is the Expected Net Present Value?
Give your answer to the nearest whole $.
Suggested Answer: A
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28 comments · newest first
MA
Margarett
10 months ago
$1.1 million seems like a lot for just a machine.
VI
Viola
10 months ago
I think the NPV will definitely be positive.
RA
Ramonita
10 months ago
The expected cash flows look promising!
DA
Daron
11 months ago
I calculated around $82,500, so that sounds about right!
PA
Pansy
11 months ago
Wait, are we sure about those probabilities? They seem off.
TI
Tijuana
11 months ago
I think we need to multiply each cash flow by its probability to get the expected cash flow, then discount it back to present value. But I’m not entirely confident about the discounting part.
KA
Kattie
11 months ago
I feel a bit confused about how to incorporate the selling price of the machine at the end. Does it get added to the cash flows?
TE
Teddy
12 months ago
This question is similar to the practice problems we did on NPV calculations. I think we need to find the expected cash flow first before discounting.
JE
Jennifer
12 months ago
I remember we calculated expected cash flows in class, but I'm not sure how to apply the probabilities here.
FR
Freida
12 months ago
I'm feeling pretty confident about this one. NPV calculations are one of my strengths, and the information provided seems pretty clear. I'll just need to work through it step-by-step and double-check my work.
DE
Deandrea
1 year ago
This seems pretty straightforward. I'll just need to be careful with the calculations, especially discounting the cash flows and terminal value. As long as I don't make any silly mistakes, I should be able to nail this.
MA
Marion
1 year ago
Okay, I think I've got this. I'll use the 5% cost of capital to discount the cash flows and terminal value, then add them up to get the NPV. Should be straightforward enough if I can just remember the NPV formula.
PO
Portia
1 year ago
Hmm, I'm a bit confused by the probability distributions for the cash flows. Do I need to do some kind of weighted average calculation to find the expected cash flow for each year?
WI
Willard
1 year ago
This looks like a classic net present value (NPV) calculation problem. I'll need to discount the expected cash flows and the terminal value to the present value, then add them up to get the NPV.
DA
Daron
1 year ago
Ah, the good old time value of money problem. I'll just plug these numbers into my trusty financial calculator and... Wow, that's a lot of buttons to press. Let's hope I don't accidentally order a pizza instead of calculating the NPV.
SH
Sherell
1 year ago
Yeah, it's always good to be careful with these calculations. Better safe than sorry!
SH
Shawna
1 year ago
Don't worry, just take your time and double-check the numbers before hitting calculate.
IS
Isabelle
1 year ago
Hmm, let me see... 0.4 * $200,000 + 0.5 * $280,000 + 0.1 * $350,000 = $258,000 in expected annual cash flows. Discounting that at 5% over 5 years, I get $1,182,295. Subtract the initial cost of $1,100,000, and the NPV is $82,295. Pretty straightforward!
JA
Janessa
1 year ago
Yes, it seems like a profitable investment with a decent return.
JE
Jessenia
1 year ago
So the investment looks like a good idea with a positive NPV.
LU
Luisa
1 year ago
That's correct! The Expected Net Present Value is $82,295.
GE
Gerri
1 year ago
You're right, we should take into account the cost of capital when calculating the Expected Net Present Value.
JO
Johana
1 year ago
Wait, so the machine is expected to have cash inflows for 5 years, but what's the salvage value at the end? I need to factor that in to get the true NPV.
LA
Latia
1 year ago
Got it, thanks for clarifying!
EL
Elza
1 year ago
So, the Expected Net Present Value is $82,550.
JE
Jenelle
1 year ago
Salvage value at the end is $100,000.
LE
Lezlie
1 year ago
I believe it is actually $82550 because we need to consider the cost of capital.
GE
Gerri
1 year ago
I think the Expected Net Present Value is $82295.