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21 February, 09:36

Stellan Manufacturing is considering the following two investment proposals: Proposal X Proposal Y Investment $ 720 comma 000 $ 512 comma 000 Useful life 5 years 4 years Estimated annual net cash inflows received at the end of each year $ 150 comma 000 $ 110 comma 000 Residual value $ 58 comma 000 $0 Depreciation method Straight Minusline Straight Minus Line Annual discount rate 10% 9% Present value of an ordinary annuity of $1: 8% 9% 10% 1 0.926 0.917 0.909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 4 3.312 3.240 3.170 5 3.993 3.809 3.791 6 4.623 4.486 4.355 Compute the present value of the future cash inflows from Proposal Y.

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  1. 21 February, 12:11
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    Present value of future cash inflows of Project Y = $110,000 X 3.240 = $356,400

    Explanation:

    Provided cost of Proposal Y = $512,000

    Residual Value = $0

    Depreciation will not be considered as we need to consider the present value of future cash flows, depreciation does not involve any cash flow.

    Useful life = 4 years

    Estimated cash inflow per year = $110,000

    Discount rate = 9%

    Present Value of an Ordinary Annuity = 3.240 @ 9% for 4 years

    Thus present value of future cash inflows = $110,000 X 3.240 = $356,400

    Note: Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outflow = $356,400 - $512,000 = - $155,600

    Final Answer

    Present value of future cash inflows of Project Y = $110,000 X 3.240 = $356,400
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