what is the formula used to find present values for each year, and are these ans
ID: 2815242 • Letter: W
Question
what is the formula used to find present values for each year, and are these answers right with work shown?
Styles 2 Mrs. Beverly LeBlanc (F381 Fa05) is evaluating the three mutually-exclusive investment projects shown below. If the projects are equally risky, profits are received at year-end, and the required return is 10%(1%) which, of these-projects, would, Beverly. recommend be adopted? After-TaxProfits-nProject 1c Yeara $1,000 $1,000 $1,000a $1,000 $2,000 $3,000 a 0-1 Avg. Annual Profit1000 Chose A, because-you-get-the-money-sooner. and itis factors wotked out and how he gotthose numbers 10001000 Present Value $2.486.85 S2.329.08 $2/253.945 consistent. worl this out fora credit Show interes Al.1. Project AL is preferred because profits Qeived sooner are more valuable than those same profits received later. Why? (After-Ex.3.3. I.N#3- yourself) EXTRA Credit Homework #31.1 you should come back to this problem and VERIFY these PV's forExplanation / Answer
Formula used to calculate present values for each year:
Present Value = Future Value * [ 1/(1+ rate of return)^period]
Calculation and working shown are correct
Project A:
1 Year : 1000*(1/1.10^1)=1000*0.9091= $909.10
2 Year: 1000*(1/1.10^2)= 1000*0.8264= $826.40
3 Year: 1000*(1/1.10^3)= 1000*0.7513= $751.30
Total Present Value= $2486.8
Project B:
Year 1: 0
Year 2: 1000*(1/1.10^2)= 1000*0.8264= $826.40
Year 3: 2000*(1/1.10^3)= 2000*0.7513= $1502.60
Total Present Value = $2329
Project C:
Year 1 : 0
Year 2: 0
Year 3: 3000 * (1/1.10^3) = 3000*0.7513= $2253.94
Total Present Value : $2253.9
Higher Present Value in Project A So, Project A should be accepted
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