Answer:
To calculate the present value of cash inflows, we will use the discounted cash flow (DCF) method. The DCF formula is as follows:
PV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3
Where: PV = Present Value CF1 = Cash inflow in year 1 CF2 = Cash inflow in year 2 CF3 = Cash inflow in year 3 r = Discount rate
Given: CF1 = $75,000 CF2 = $135,000 CF3 = $210,000 r = 11% or 0.11 (as a decimal)
(a) Calculate the Present Value of cash inflows:
PV = $75,000 / (1 + 0.11)^1 + $135,000 / (1 + 0.11)^2 + $210,000 / (1 + 0.11)^3
PV = $75,000 / 1.11 + $135,000 / 1.11^2 + $210,000 / 1.11^3
PV = $67,567.57 + $109,246.58 + $157,971.40
PV ≈ $334,785.55
The Present Value of the cash inflows is approximately $334,785.55.
(b) To determine if the factory is a good investment, we compare the Present Value of the cash inflows to the cost of the factory.
Cost of the factory = $350,000
If the Present Value of the cash inflows is greater than the cost of the factory ($334,785.55 > $350,000), then the factory would not be a good investment. However, if the Present Value of the cash inflows is equal to or greater than the cost of the factory ($334,785.55 ≥ $350,000), then the factory can be considered a good investment.
In this case, since the Present Value of the cash inflows is less than the cost of the factory, the factory is not a good investment.
Therefore, the answer is No, the factory is not a good investment.