The following information relates to three independent investment decisions, eac
ID: 331779 • Letter: T
Question
The following information relates to three independent investment decisions, each with a 10-year life and no salvage value.
Using the present value tables in Exhibits 26–3 and 26–4, compute for the missing information pertaining to each investment proposal. (Round "PV factors" to 3 decimal places.)
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The following information relates to three independent investment decisions, each with a 10-year life and no salvage value.
Using the present value tables in Exhibits 26–3 and 26–4, compute for the missing information pertaining to each investment proposal. (Round "PV factors" to 3 decimal places.)
EXHIBIT 26-3 Present Value of $1 Due in n Periods* Discount Rate Number of Periods Present Value of $1 Payable in n Periods 20% 833 907890 857826 .797.756.694 5% 6% 8% 10% 12% 15% 990 985 980 952 943 926 909 893 870 97 1 3 971.956 864840.794.751.712 .658 .579 961 951 942 933 .901 923 942.823 .792735 683 636.572 482 402 335 279 233 .194 .162 026 013 001 621 564 567 507 452 404 424361 386 .322 .104 066 017 497 432 376 327 284 247 061 035 007 928.784 .747.681 915 6 .746 .711 677 645 705 665 627 592 558 630 583 540 500 463 467 905 820 788 699 875 862 742 700 585 20 377.312 310 .247 158 .123 149 102 032 36 173 063 "The present value of $1 is computed by the formula p = periods until the future cash flow will occur. Amounts in this table have been rounded to three decimal places and are shown for a limited number of periods and discount rates. Many calculators are programmed to use this formula and can compute present values when the future amount is entered 1+ jn, where p ?s the present value of $1, ,is the discount rate, and n is the number ofExplanation / Answer
A B C Investment cost $49,150 $141,250 $80,520 Incremental annual cash inflows 14,000 37,000 19,000 Incremental annual cash outflows 6,000 12,000 7,000 Discount rate yielding a net present value of zero 10.00% 12.00% 8.00% Calculation: Project A Year Investment cost Incremental annual cash inflows Incremental annual cash outflows Net Cash Flow (CF) PV Discounted at 10% (=CF/(1+10%)^t) 0 $49,150 ($49,150) ($49,150) 1 14,000 6,000 8,000 $7,273 2 14,000 6,000 8,000 $6,611 3 14,000 6,000 8,000 $6,010 4 14,000 6,000 8,000 $5,464 5 14,000 6,000 8,000 $4,967 6 14,000 6,000 8,000 $4,515 7 14,000 6,000 8,000 $4,104 8 14,000 6,000 8,000 $3,731 9 14,000 6,000 8,000 $3,392 10 14,000 6,000 8,000 $3,084 NPV $0 Project B Year Investment cost Incremental annual cash inflows Incremental annual cash outflows Net Cash Flow (CF) PV Discounted at 12% (=CF/(1+12%)^t) 0 $141,250 ($141,250) ($141,250) 1 37,000 12,000 25,000 $22,321 2 37,000 12,000 25,000 $19,930 3 37,000 12,000 25,000 $17,794 4 37,000 12,000 25,000 $15,887 5 37,000 12,000 25,000 $14,185 6 37,000 12,000 25,000 $12,665 7 37,000 12,000 25,000 $11,308 8 37,000 12,000 25,000 $10,096 9 37,000 12,000 25,000 $9,015 10 37,000 12,000 25,000 $8,049 NPV $0 Project C Year Investment cost Incremental annual cash inflows Incremental annual cash outflows Net Cash Flow (CF) PV Discounted at 8% (=CF/(1+8%)^t) 0 $80,520 ($80,520) ($80,520) 1 19,000 7,000 12,000 $11,111 2 19,000 7,000 12,000 $10,288 3 19,000 7,000 12,000 $9,526 4 19,000 7,000 12,000 $8,820 5 19,000 7,000 12,000 $8,167 6 19,000 7,000 12,000 $7,562 7 19,000 7,000 12,000 $7,002 8 19,000 7,000 12,000 $6,483 9 19,000 7,000 12,000 $6,003 10 19,000 7,000 12,000 $5,558 NPV $0
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