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

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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