EmKay Inc. has $1,000,000 available to invest. It has narrowed its choices to two investments, and each is expected to generate income over a 10-year period. Investment A is expected to generate a net income of $100,000 at the end of year one with an annual increase of $20,000 each year in net annual income over the subsequent 9 years. Investment B is expected to generate a net income of $80,000 at the end of year one and the net annual income over each of the next 9 years is expected to be 20% larger than the previous year's net annual income. The company's TVOM is 8% per year compounded annually. a) b) c) any? Explain. Compute the present worth of the net income from Investment A over the 10-year period. Compute the present worth of the net income from Investment B over the 10-year period. Based on the above present worth calculations, which investment should EmKay, Inc. choose, if
EmKay Inc. has $1,000,000 available to invest. It has narrowed its choices to two investments, and each is expected to generate income over a 10-year period. Investment A is expected to generate a net income of $100,000 at the end of year one with an annual increase of $20,000 each year in net annual income over the subsequent 9 years. Investment B is expected to generate a net income of $80,000 at the end of year one and the net annual income over each of the next 9 years is expected to be 20% larger than the previous year's net annual income. The company's TVOM is 8% per year compounded annually. a) b) c) any? Explain. Compute the present worth of the net income from Investment A over the 10-year period. Compute the present worth of the net income from Investment B over the 10-year period. Based on the above present worth calculations, which investment should EmKay, Inc. choose, if
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:EmKay Inc. has $1,000,000 available to invest. It has narrowed its choices to two investments,
and each is expected to generate income over a 10-year period. Investment A is expected to generate a net
income of $100,000 at the end of year one with an annual increase of $20,000 each year in net annual income
over the subsequent 9 years. Investment B is expected to generate a net income of $80,000 at the end of year
one and the net annual income over each of the next 9 years is expected to be 20% larger than the previous
year's net annual income. The company's TVOM is 8% per year compounded annually.
a)
b)
c)
any? Explain.
Compute the present worth of the net income from Investment A over the 10-year period.
Compute the present worth of the net income from Investment B over the 10-year period.
Based on the above present worth calculations, which investment should EmKay, Inc. choose, if
Expert Solution
Step 1
a)
Net present value (NPV) is the contrast between the present value of money inflows over some undefined time frame and the present value of money outpourings. The NPV is utilized to dissect the benefit of anticipated speculation or undertaking in capital budgeting and venture arranging.
Step 2
Computation:
Step 3
Hence, the present worth of the net income from investment A is $190,544.77.
Step 4
Working note:
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