Question - Post Audit Evaluation:
Bob James is reviewing his company's investment in a cement plant. The company paid $15,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. Mr. James wants to know whether the plant has met its original expectations before he decides its fate. The company's discount rate for the present value computations is 8%. Expected and actual cash flows follow:
|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
Expected
|
$3,300,000
|
$4,920,000
|
$4,560,000
|
$4,980,000
|
$4,200,000
|
|
Actual
|
2,700,000
|
3,060,000
|
4,920,000
|
3,900,000
|
3,600,000
|
a. Compute the net present value of the expected cash flows as of the beginning of the investment.
b. Compute the net present value of the actual cash flows as of the beginning of the investment
c. What would you conclude from this post audit?