Annual cash inflows that will arise from two competing investment projects are g
ID: 2470781 • Letter: A
Question
Annual cash inflows that will arise from two competing investment projects are given below:
The discount rate is 8%.
Compute the present value of the cash inflows for each investment. Each investment opportunity will require the same initial investment. (Round discount factor(s) to 3 decimal places.)
In three years, when he is discharged from the Air Force, Steve wants to buy an $32,000 power boat.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
The Atlantic Medical Clinic can purchase a new computer system that will save $4,000 annually in billing costs. The computer system will last for seven years and have no salvage value
Required:
Up to how much should the Atlantic Medical Clinic be willing to pay for the new computer system
if the clinic’s required rate of return is: (Round discount factor to 3 decimal places.)
The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state’s newest millionaire. By choosing the six winning numbers on last week’s state lottery, Mr. Ormsby has won the week’s grand prize totaling $1.46 million. The State Lottery Commission has indicated that Mr. Ormsby will receive his prize in 20 annual installments of $73,000 each.
If Mr. Ormsby can invest money at a 8% rate of return, what is the present value of his winnings?(Round discount factor to 3 decimal places.)
Annual cash inflows that will arise from two competing investment projects are given below:
Explanation / Answer
Answer to Part 1.
Present Value of all cash inflow at 8% discounting rate for Investment A is
= 3000/1.08 + 4000/1.08^2 + 5000/1.08^3 + 6000/1.08^4
= $14,586.47
Present Value of all cash inflow at 8% discounting rate for Investment B is
= 6000/1.08 + 5000/1.08^2 + 4000/1.08^3 + 3000/1.08^4
= $15,222.67
Answer to Part 2.
Steve has to pay the amount of $32,000 at the end of 3 years. So using Exhibits 13B-3
Present Value of $32,000 = 32,000*0.794(Present Value of $1 payable after years using 8% discounting rate)
= $25,408
So, Steve has to invest $25,408 right now to have $32,000 at the end of 3 years.
Answer to Part 3.
The Atlantic Medical Clinic will pay the maximum amount of the PV of all the saving made by the software.
So, PV of $4,000 each year for 7 years = 4,000*5.206(Present Value of annuity of $1 for 7 years with discount rtae of 8% from Exhibits 13B-4)
= $20,824
So, they should pay a maximum value of $20,824 for the software.
Answer to Part 4.
If Mr. Ormsby invest all his lottery income of $73,000 received in 20 installments, then
the present value of his winning = 73,000 * 9.818(Present Value of $1 annuity of 20 years discounting rate of 8% taken from Exhibits 13B-4)
= $716,714
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