Chapter 8 Exercise 1: 1. Basic present value calculations Calculate the present

Question

Chapter 8 Exercise 1:

1. Basic present value calculations

Calculate the present value of the following cash flows, rounding to the nearest dollar:

a. A single cash inflow of $12,000 in five years, discounted at a 12% rate of return.

b. An annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of return.

c. A single receipt of $15,000 at the end of Year 1 followed by a single receipt of $10,000 at the end of Year 3. The company has a 10% rate of return.

d. An annual receipt of $8,000 for three years followed by a single receipt of $10,000 at the end of Year 4. The company has a 16% rate of return.

Explanation / Answer

Dep using SLN mehod = (Cost-Salvage)/life = (246000-0)/10 = 24,600 pa
Net CF = 61500
Addback Dep written-off = 24,600
So Total CF = 61500+24600 = $86,100 pa

a. Compute the average rate of return, giving effect to straight-line depreciation on the investment. Do not enter the percent sign.
= 86100/246000 = 35%

b. Compute the cash payback period.
Cash PBP = Total Investment/Annual CF = 246000/86100 = 2.86 yrs

c. Compute the net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar.
PV factote for $1 for 10 Yrs @10% = 6.145
Present value of annual net cash flows: $86100*6.145 = $529,085
Amount to be invested: 246000
Net present value: $529,085 -246,000 = $283,085

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