on of in the The value of Asset A is S (Round to the nearest cent ) O Data Table

Question

on of in the The value of Asset A is S (Round to the nearest cent ) O Data Table The value of Asset B is $[] (Round to the nearest cert.) The value of Asset C is (Round to the nearest cent) (Click on the icon located on the top-right comer of the data table below in or The value of Asset Dis (Rourd to the nearest cent.) The value of Asset E is s (Round to the nearest cent) copy its contents into a spreadsheet.) st End of Year Amount Appropriate required return 18% $ 4,000 4,000 4,000 B 1 through co 400 $0 16% 33,000 1,600 9,000 $ 3,000 4,000 6,000 8,000 D 1 through 5 15% Enter your answer in each of the answer boxes

Explanation / Answer

a) Since, each year the cash flows are uniform, we can multiply the cash flows with the present value factor annuity (PVFA) at the given rate -

Value of Asset A = $4000 x PVFA (18%, 3) = $4000 x 2.17427292952 = $8,697.09

b) Since cash flows will occur till infinity, just the divide the yearly cash flows with the required rate of return -

Value of Asset B = $400 / 15% = $2,666.67

c) Multiply cash flow at year end 5 with the present value factor (PVF) of year 5 @ 16%

Value of Asset C = $33000 x 0.4761130154 = $15,711.73

d) We use PVFA for years 1 to 5 and PVF for year 6 -

Value of Asset D = $1600 x PVFA (13%, 5) + $9000 x PVF (13%, 6) = $1600 x 3.51723126151 + $9000 x 0.48031852742 = $9950.44

e) Since, we have different cash flows each year, we have multiply them with PVF of each year -

Note :

NOTE : Present value factor (PVF) is computed as 1 / (1 + rate)n where, rate in our case is 18% in the first case (asset a), n being the year for which it is calculated. Like for year 1, it would 1 / (1.18)1 = 0.84745762711, for year 2 it would be 1 / (1.18)2 = 0.71818442975 and for year 3 it would be 1 / (1.18)3 = 0.60863087266

To compute Present value factor annuity (PVFA), you need to compute PVF for 3 years (number of years) and add them all which gives us PVFA of 2.17427292952

In case you have a PVFA table available with you, you can use that as well.

Particulars Year PVF@15% Amount Present Value Cash flows 1 0.86956521739 $3000 $2608.70 2 0.75614366729 $4000 $3024.57 3 0.65751623242 $6000 $3945.10 4 0.57175324558 $8000 $4574.03 5 0.49717673528 $5000 $2485.88 Value of Asset E $16638.28

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