The proposed 'asset' investment for a new restaurant is $2,000,000. The restaurant is expected to generate cash inflows of $300,000 during its 'project' life of ten (10) years. The Weighted Cost of Capital is 10%. What is the Present Value of a 'cash' investment that would generate $300,000 annually, discounted (required rate of return) at 10%?

Question

The proposed 'asset' investment for a new restaurant is $2,000,000. The restaurant is expected to generate cash inflows of $300,000 during its 'project' life of ten (10) years. The Weighted Cost of Capital is 10%. What is the Present Value of a 'cash' investment that would generate $300,000 annually, discounted (required rate of return) at 10%?

(b) $300,000 annually, discounted at 8%?

Answer 1

To calculate the present value of an investment, you can use the formula for present value of an annuity:

PV = A / (1 + r)^n

Where:
PV = Present Value
A = Cash inflows per period (in this case, $300,000)
r = Discount rate (in this case, 10% or 0.10)
n = Number of periods (in this case, 10 years)

For the first question, we need to calculate the present value of a $300,000 annual cash inflow discounted at 10%.

PV = $300,000 / (1 + 0.10)^10
= $300,000 / (1.10)^10
= $300,000 / 2.5937 (rounded to 4 decimal places)
≈ $115,675.79

So, the present value of a cash investment that would generate $300,000 annually, discounted at 10% over a period of 10 years is approximately $115,675.79.

For the second question, we need to calculate the present value of a $300,000 annual cash inflow discounted at 8%.

PV = $300,000 / (1 + 0.08)^10
= $300,000 / (1.08)^10
= $300,000 / 2.1589 (rounded to 4 decimal places)
≈ $138,841.38

So, the present value of a cash investment that would generate $300,000 annually, discounted at 8% over a period of 10 years is approximately $138,841.38.