Business

FinanceQ&A LibraryThe company you work for is considering a new product line projected to have the net cash flows (NCF) shown. The values are in future dollars, which have been inflated by 5% per year. Because the plant manager is unsure how the present worth is calculated, he asked you to do it in two ways over the 4-year planning horizon: (1) using the company’s market rate of 20% per year, and (2) converting all of the estimates into CV dollars and using the company’s real rate. You said both ways will provide the same answer, but he asked you to show him the calculations. What is the present worth by method (1) and method (2)? Solve by hand and spreadsheet. Year 0 1 2 3 4 NCF, $1000 −10,000 2000 5000 5000 5000Start your trial now! First week only $4.99!*arrow_forward*

Question

The company you work for is considering a new

product line projected to have the net cash flows

(NCF) shown. The values are in future dollars,

which have been inflated by 5% per year. Because

the plant manager is unsure how the present worth

is calculated, he asked you to do it in two ways over

the 4-year planning horizon: (1) using the company’s

market rate of 20% per year, and (2) converting

all of the estimates into CV dollars and using the

company’s real rate. You said both ways will provide

the same answer, but he asked you to show him

the calculations. What is the present worth by

method (1) and method (2)? Solve by hand and

spreadsheet.

Year 0 1 2 3 4

NCF, $1000 −10,000 2000 5000 5000 5000

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