You have a total of 700,000 to invest. Available opportunities include: a. A Cer
ID: 2758806 • Letter: Y
Question
You have a total of 700,000 to invest. Available opportunities include: a. A Certificate of Deposit which yields 12% per year for 8 years and allows no deposits or withdrawals until the end of the 8th year. b. A passbook bank account which allows deposits at any time it yields 3% per year. c. Machine A which has initial cost 400,000 yields a yearly revenue of 70000 per year and a Salvage Value of 10,000 at 8 years. 3% is the interest rate used to analyze this choice. d. Machine B which has initial cost 200,000 yields a yearly revenue of 40000 per year and a Salvage Value of 20000 at 8 years. 3% is used.Explanation / Answer
(a) Future value = Present value(1+r)n
Future value = 700,000 (1.12)8 = 700,000 x 2.48 = $ 1,736,000
Earning = 1,736,000 - 700,000 = $ 1,036,000
(b) Future value = Present value(1+r)n
Future value = 700,000(1.03)8 = 700,000 x 1.27 = 886,739
Earning = 886,739 - 700,000 = $ 186,739
(c) Present value of cash inflow = 70,000 x PVIFA(3%,8 year)+ 10,000 x PVIF(3%, 8 year)
Present value of cash inflow = 70,000 x 7.02 + 10,000 x 0.789 = 491,400 + 7,890 = $ 499,290
Net Present value = Present value of cash inflow - Initial cash outflow
Net Present value = 499,290 - 400,000 = $ 99,290
(d) Present value of cash inflow = 40,000 x PVIFA(3%,8 year)+ 20,000 x PVIF(3%, 8 year)
Present value of cash inflow = 40,000 x 7.02 + 20,000 x 0.789 = 280,800 + 15,780 = $ 296,580
Net Present value = Present value of cash inflow - Initial cash outflow
Net Present value = 296,580 - 200,000 = $ 96,580
Hence, the best choice using future worth at 8 years is Certificate of deposit. It is because, it gives earning of $ 1,036,000 from investing $ 700,000.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.