Answer:
Value of factory = $64,220
Explanation:
Here, for the given information,
To calculate value of factory we will calculate the Net Present Value.
Net Present Value = Present value of cash inflows - Present value of cash outflow.
Present value of cash outflow = Cost of factory today = $400,000
Discounting factor @ 12% for each year shall be
Year 1 = [tex]\frac{1}{(1+0.12)^1} = 0.893[/tex]
Year 2 = [tex]\frac{1}{(1+0.12)^2} = 0.797[/tex]
Year 3 = [tex]\frac{1}{(1+0.12)^3} = 0.712[/tex]
Therefore, present value of cash inflows = [tex](120,000 \times 0.893) + (180,000 \times 0.797) + (300,000 \times 0.712) = 464,220[/tex]
Net Present Value = Value of factory = $464,220 - $400,000 = $64,220
