A company has two investment possibilities, with the following cash inflows: Investment Year 1 Year 2...

A company has two investment possibilities, with the following cash inflows: Investment Year 1 Year 2 Year 3 A $1,600 1,800 2,000 B $1,200 1,200 1,200 If the firm can earn 7 percent in other investments, what is the present value of investments A and B? Use Appendix B and Appendix D to answer the question. Round your answers to the nearest dollar. PV(Investment A): $ PV(Investment B): $ If each investment costs $4,000, is the present value of each investment greater than the cost of the investment? The present value of investment A is -Select- the cost. The present value of investment B is -Select- the cost.

Solutions

Expert Solution

Calculate present value of cash flow for investment A

Present value	Cash flow*Present value of $1(i=7%, n)

Year	Cash flow	Discount factor @ 7%	Present value
1	$1,600	0.9346	$1,495.36
2	$1,800	0.8734	$1,572.12
3	$1,200	0.8163	$979.56
Total			$4,047.04
Thus, present value of investment A is $4,047.04

Calculate present value of cash flow for investment B

Present value	Cash flow*Present value of $1(i=7%, n)

Year	Cash flow	Discount factor @ 7%	Present value
1	$1,200	0.9346	$1,121.52
2	$1,200	0.8734	$1,048.08
3	$1,200	0.8163	$979.56
Total			$3,149.16
Thus, present value of investment B is $3,149.16

For investment A, the present value of investment cash flow is higher than costs
For investment B, the present value of investment cash flow is lower than costs

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

The Zinger Company is considering an $11,000 investment that has the following net cash inflows: Year...

The Zinger Company is considering an $11,000 investment that has the following net cash inflows: Year 1………..$2,000 Year 2………..$2,000 Year 3………..$5,000 Year 4………..$4,000 Year 5………..$4,000 The payback period for this investment is: a. 3.0 years. b. 3.5 years. c. 4.0 years. d. 4.5 years.

A firm has two $1,000, mutually exclusive investment alternatives with the following cash inflows. The cost...

A firm has two $1,000, mutually exclusive investment alternatives with the following cash inflows. The cost of capital is 6 percent. Year Cash Inflow A B 1 $175 $1,100 2 175 - 3 175 - 4 175 - 5 175 - 6 175 - 7 175 - 8 175 - a. What is the internal rate of return on each investment? Which investment should the firm make? b. What is the net present value of each investment? Which investment should...

Davis Chili Company is considering an investment of $60,000, which produces the following inflows: Year Cash...

Davis Chili Company is considering an investment of $60,000, which produces the following inflows: Year Cash Flow 1 $ 27,000 2 26,000 3 23,000 Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Determine the net present value of the project based on a zero percent discount rate. Net present value $ b. Determine the net present value of the project based on a 10 percent discount rate. (Do...

Peri Corporation is considering an investment opportunity with the following expected net cash inflows: Year 1,...

Peri Corporation is considering an investment opportunity with the following expected net cash inflows: Year 1, $260,000; Year 2, $340,000; Year 3, $390,000. The company uses a discount rate of 11%, and the initial cost of the investment is $770,000. The IRR of the project will be ________. a between 11% and 12% b between 12% and 13% c more than 13% d less than 11%

A company is expected to generate the following cash inflows: Year 1: $10,000 Year 5: $25,000...

A company is expected to generate the following cash inflows: Year 1: $10,000 Year 5: $25,000 Year 7: $20,000 What is the value of these cash flows in year 10 if the interest rate is 13%?

A company estimates the following net cash inflows and outflows for a capital investment project that...

A company estimates the following net cash inflows and outflows for a capital investment project that is currently under consideration. year Cash flow 0 (575,000) 1 45,800 2 99,000 3 104,300 4 118,700 5 130,400 6 129,000 7 116,500 8 77,200 9 55,000 10 12,500 Calculate the ARR and NPV of the project.

A project with an initial investment of $46,000 and cash inflows of $11,000 a year for...

A project with an initial investment of $46,000 and cash inflows of $11,000 a year for six years, calculate NPV given a required return of 12%/year. Select one: a. $888 b. -$347 c. -$1,205 d. -$775 e. $1,699

Problem 1. Annual cash inflows that will arise from an investment are given below. Year 1:...

Problem 1. Annual cash inflows that will arise from an investment are given below. Year 1: 5,000 Year 2: 4,000 Year 3: 8,000 Year 4: 6,000 Total $23,000 Compute the present value of the cash inflows assuming a 12% discount rate. Problem 2. Lennox Company plans to construct a new factory 10 years from now. It is estimated the factory will cost $1,000,000 to build. What lump sum amount should the company invest now to have $1,000,000 available at the...

A real estate investment has the following expected cash flows: Year 0 Year 1 Year 2...

A real estate investment has the following expected cash flows: Year 0 Year 1 Year 2 Year 3 Year 4 Cashflow 10,000 25,000 50,000 35,000 The discount rate is 9%. What is the investment’s value 4 years from now? Select one: a. $ 132,152 b. $103,700 c. $ 113,345 d. $120,000 e. $130,757

A real estate investment has the following expected cash flows: Year Cash Flows 1 $7,000 2...

A real estate investment has the following expected cash flows: Year Cash Flows 1 $7,000 2 17,000 3 22,000 4 22,000 The discount rate is 11 percent. What is the investment’s present value? Round it to two decimal places, i.e., 1234.45.

Subjects