1. You have won a contest that will pay you $10,000 a year at the end of each of
ID: 2756341 • Letter: 1
Question
1. You have won a contest that will pay you $10,000 a year at the end of each of the next 5 years. Based on a discount rate of 8% per year, what is the annuity worth to you today? (Show calculation)
2. For a specific project, a financial manager computes the accounting return, payback, discounted cash flow valuation, profitability index, and internal rate of return:
Which measure refers to the discount rate that causes the net present value of the project to equal zero?
Which measure examines the length of time it will take for the company to recoup its investment?
Which measure refers to the ratio of the project’s future cash flows to the project’s initial cash outlay?
Which measure is the easiest to compute due to the easy availability of information needed?
Explanation / Answer
1. Annuity value today = $10000x3.9927
= 39927
2. Internal rate of return refers to the discount rate that causes the net present value of the project to equal zero.
Payback examines the length of time it will take for the company to recoup its investment.
Profitability index refers to the ratio of the project’s future cash flows to the project’s initial cash outlay.
Accounting return is the easiest to compute due to the easy availability of information needed.
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