Below are two investment ideas to work with: Use straight-line amortization in a
ID: 2446768 • Letter: B
Question
Below are two investment ideas to work with:
Use straight-line amortization in all calculations and exclude income taxes.
IDEA ONE
IDEA TWO
Initial capital investment
$120,000
$180,000
Estimated useful life
3 years
3 years
Estimated terminal salvage value
0
0
Estimated annual savings in cash
operating costs
$50,000
$80,000
Minimum desired rate of return
10 %
12 %
Present Value of $1 (3 years)
Present Value of an Annuity of $1 (3 years)
8%
0.7938
2.5771
10%
0.7513
2.4869
12%
0.7118
2.4018
14%
0.6750
2.3216
16%
0.6407
2.2459
The net present value in IDEA ONE is
A) $4,345
B) $82,435
C) $50,000
D) $90
The net present value in IDEA TWO is
A) $80,000
B) $12,144
C) $-328 (negative amount)
D) $123,056
Using the Present Value table above, calculate the present value of 5-year annuity of $10,000 and an annual earning return of 8%.
A) $31,700
B) $34,700
C) $37,910
D) $39,930
IDEA ONE
IDEA TWO
Initial capital investment
$120,000
$180,000
Estimated useful life
3 years
3 years
Estimated terminal salvage value
0
0
Estimated annual savings in cash
operating costs
$50,000
$80,000
Minimum desired rate of return
10 %
12 %
Explanation / Answer
Net Present Value of the Idea One Year Cash Flow Discount Net Cash Flows 0 -120000 1 -120000 Savings 50000 2.4869 124345 NPV 4345 The correct answer is A. $ 4345 Net Present Value of the Idea Two Year Cash Flow Discount Net Cash Flows 0 -180000 1 -180000 Savings 80000 2.4018 192144 NPV 12144 The correct answer is B. $ 12144 3 PV = 10000/(1+.08)5 = 10000*3.99 = 39930 The correct answer is D) $ 39930
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