Below are two investment ideas to work with: Use straight-line amortization in a
ID: 2445857 • 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
3. 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
NPV of IDEA ONE :
As the saving is annual we would use the annuity table ,
As the desired rate of return is 10 % , the value corresponding to 10% in the annuity table is 2.4869
Hence NPV = Annual Saving * Annuity factor - Initial investment
= 50000 * 2.4869 - 120000
= 124345 - 120000
= 4345
Hence option A is correct for IDEA ONE
NPV for IDEA TWO
annuity factor for IDEA TWO is 2.4018 which corresponds to 12% return ,
Hence NPV = Annual saving * annuity factor - Initial Investment
= 80000 * 2.4018 - 180000
= 192144 - 180000
= 12144
Hence option B is correct for IDEA TWO
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.