# Chapter 12. Question 16

## 12.1Screen 1 of 1

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### Question 12.1

A. The discounted cash flow of \$2 million for the first year is \$GKGUX6GkyDAsMh+mbGN24Q==. (Round to the nearest dollar.)

Correct! The discounted cash flow of \$2 million for one year is \$1,851,852.
Inorrect! The discounted cash flow of \$2 million for one year is calculated by dividing \$2 million by 1.08. Rounding to the nearest dollar results in \$1,851,852.

### Question 12.2

B. The number of years it will take to recover the initial \$10 million investment is I0N5oPvoADQ= years. (Provide the answer as a whole number.)

Correct! It will take 7 years to recover the initial investment.
Incorrect! It would take 7 years. Continue the calculation from the first part of the problem to determine the present value for subsequent years. The present value of \$2 million collected for year 2 is \$2 million / (1.08)2 = \$1,714,678. Continuing these calculations by dividing \$2 million by (1.08)n for each year (n = 3, 4, 5…), the present value of total future revenues will exceed \$10 million after year 7. (Year 3 = \$1,587,664; Year 4 = \$1,470,060; Year 5 = \$1,361,166; Year 6 = \$1,260,339; Year 7 = \$1,166,981.)

For further review, see section “Present Value Approach” (link to section in ebook).