Question

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 end of the 10-year period? Assume that the company can invest

money at 12%.

Problem 3.

Congratulations! You’ve won the lottery. Your winnings? You will receive $20,000 annually

for 10 years! Assuming you can earn 10% on your investments, what is the present value of

your winnings?

Problem 4.

You borrow $10,000 from the bank today and promise equal annual repayments for 10 years.

Assuming a 6% interest rate, how much is each annual repayment?

HINT: This problem is a riff off of Exercise 13A-5 and Exercise 13A-6 on page 626 in the book.

Those were your practice exercises. Here is the solution to Exercise 13A-5 again:

Payment Amount * factor from Exhibit 13B-2 = Present Value

(16%, 8)

7,000 * 4.344 = $30,408

In this problem, the difference is you know the ‘Present Value’ and you can look up the ‘Factor’.

You will be using your mad algebra skills to solve for the ‘Payment Amount’. So plug in the

known amounts to the formula above....and solve for ‘Payment Amount’. Give it a try!

Answer 1

Problem:1
			(Amt in $)
Year	Annual Cash Inflows	Present Value Factor @ 12 %	Present Value
1	5,000.00	0.893	4,465.00
2	4,000.00	0.798	3,192.00
3	8,000.00	0.712	5,696.00
4	6,000.00	0.636	3,816.00
Present Value of Cash Inflows are:	17,169.00
Presrent Value= (Annual Cash Flows * Present value annuity factor for each year)
Problem:2
Present Value of the amount that needs to be invested today:
	=	Amount of Investement
	Present value annuity factor for 10year @ 12%
	=	$1000000	$176991.00
	5.65
Problem 3:		(Amt in $)
Year	Annual Earnings	Present Value Annuity Factor @ 10%	Present Value
1	20,000.00	0.909	18,180.00
2	20,000.00	0.826	16,520.00
3	20,000.00	0.752	15,040.00
4	20,000.00	0.683	13,660.00
5	20,000.00	0.621	12,420.00
6	20,000.00	0.564	11,280.00
7	20,000.00	0.513	10,260.00
8	20,000.00	0.467	9,340.00
9	20,000.00	0.424	8,480.00
10	20,000.00	0.386	7,720.00
Present Value of the Earnings	1,22,900.00
Problem 4:
Equated Annual Installements
	=	Amount of Loan
	Present value annuity factor for 10year @ 6%
	=	10000	$1358.70
	7.36