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Lyndon Company has been offered a contract to build a bridge for the state of Michigan. The...

Question:

Lyndon Company has been offered a contract to build a bridge for the state of Michigan. The contract would expire in ten years. The projected cash flows that result from the contract are given below:

Cost of equipment $500,000
Working capital needed $100,000
Net annual cash inflows $80,000
Salvage value of equipment in ten years$40,000

The company's required rate of return and discount rate is 12%. The working capital would be released at the end of the project.

What is the present value of the cost of the equipment?

a. $446,450

b. $500,000

c. $(446,450)

d. $(500,000)

Present Value:

The value today of an amount received on a specified future period is called present value. The time value of money suggests that the value of money today is not the same in the future because money has potential earning capacity.

Answer and Explanation: 1


Correct Answer: Option b. $500,000.

Explanation:

The cost of the equipment is spent in the year 0, and its current cost is equal to the present value. In the given scenario, we are given that the cost of the equipment is $500,000. It will be spent in year 0, and the discount rate for year 0 is always 1.


Learn more about this topic:

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How to Calculate Present Value of an Investment: Formula & Examples

from

Chapter 24 / Lesson 15
19K

Calculating the present value of an investment tells how much money needs to be saved now in order to reach a desired, future amount. Explore the definition of and formula for the present value of an investment, and see examples.


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