1. The following data have been gathered for a capital investment decision. Cash
ID: 2504391 • Letter: 1
Question
1. The following data have been gathered for a capital investment decision.
Cash inflows:
Year 1
$50,000
Year 2
60,000
Year 3
40,000
Year 4
50,000
Year 5
40,000
The minimum rate of return for this investment is 14 percent. The present value factors for a 14 percent discount rate are as follows:
End of Period
Present Value of $1
Present Value of an Annuity of $1
1
.877
.877
2
.769
1.646
3
.675
2.321
4
.592
2.913
5
.519
3.432
6
.456
3.888
a. Compute the present value of each of the cash inflows of the investment.
b. What would have been the present value of the cash flows if they were received in equal installments over the five-year period at the same discount rate? (Assume the total cash inflows remain same.)
c. If the answers to parts (a) and (b) differ, explain the reason(s) why.
Cash inflows:
Year 1
$50,000
Year 2
60,000
Year 3
40,000
Year 4
50,000
Year 5
40,000
Explanation / Answer
cash inflows present values PV of annuity
50,000 50,000*0.877 =43850 10,000*3.432 = 34320
60,000 60,000*0.769 =46140 12,000*3.432 = 41184
40,000 40000*0.675 = 27,000 8,000*3.432 = 27456
50,000 50,000*0.592 = 29600 10,000*3.432 = 34320
40,000 40000*0.456 = 18240 8,000*3.432 = 27456
it differs becuase, no of periods changes as well as value of money decreases with time.
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