Question
In: Accounting
If a production machine costs $18,000, and we are able to set up the following payment...
If a production machine costs $18,000, and we are able to set up the following payment arrangements with the bank:
Number of payments = 4 (one at the end of each year)
Interest Rate = 5%
Amount of each annual payment = $5,000
Questions:
1. What is the present value of the stream of cash flows (the series of payments)?
2. Will we be provided with enough purchasing power at the present time to be able to purchase the machine?
3. What do you find difficult (if anything) about present value concepts? Did your background (economics, finance) help you understand current examples of present value issues?
4. Does the text do a reasonable job of explaining the role of present value in “Capital Budgeting Decisions”? Why?
Solutions
Expert Solution
1. Present value of stream of outflow
| Year | Annual Payment | PV Factor @ 5% | PV of annual Payment |
| 1st | $5,000 | 0.95 | $4,761.90 |
| 2nd | $5,000 | 0.91 | $4,535.15 |
| 3rd | $5,000 | 0.86 | $4,319.19 |
| 4th | $5,000 | 0.82 | $4,113.51 |
| $17,729.75 |
2. The bank loan will not provide the purchasing power at the present time to be able to purchase the machine, the company would be short of $270.25.
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