Net present value-unequal lives Project 1 requires an original investment of $83,000. The project will yield cash flows of $15,000 per year for 7 years. Project 2 has a computed net present value of $19,600 over a 5-year life. Project 1 could be sold at the end of 5 years for a price of $56,000. Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below. Present Value of $1 at Compound Interest 10% Year 1 2 3 4 5 6 7 8 9 10 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 Year 1 2 3 4 5 6 7 8 9 10 Present Value of an Annuity of $1 at Compound Interest 10% 12% 0.909 0.893 1.736 1.690 2.487 2.402 3.170 3.037 2.855 3.791 3.605 3.353 4.355 4.111 3.785 4.868 4.564 4.160 5.335 4.968 4.487 5.759 5.328 4.772 4.031 6.145 5.650 5.019 4.192 6% 12% 15% 20% 0.909 0.893 0.870 0.833 0.826 0.797 0.756 0.694 0.751 0.712 0.658 0.579 0.683 0.636 0.572 0.482 0.621 0.567 0.497 0.402 0.564 0.507 0.432 0.335 0.513 0.452 0.376 0.279 0.467 0.404 0.327 0.233 0.424 0.361 0.284 0.194 0.386 0.322 0.247 0.162 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 15% 20% 0.870 0.833 1.626 1.528 2.106 2.589 2.991 3.326 3.605 3.837 2.283 a. Determine the net present value of Project 1 over a 5-year life with residual value, assuming a minimum rate of return of 6%. If required, round to the nearest dollar. $ b. Which project provides the greatest net present value?
Net present value-unequal lives Project 1 requires an original investment of $83,000. The project will yield cash flows of $15,000 per year for 7 years. Project 2 has a computed net present value of $19,600 over a 5-year life. Project 1 could be sold at the end of 5 years for a price of $56,000. Use the Present Value of $1 at Compound Interest and the Present Value of an Annuity of $1 at Compound Interest tables shown below. Present Value of $1 at Compound Interest 10% Year 1 2 3 4 5 6 7 8 9 10 6% 0.943 0.890 0.840 0.792 0.747 0.705 0.665 0.627 0.592 0.558 Year 1 2 3 4 5 6 7 8 9 10 Present Value of an Annuity of $1 at Compound Interest 10% 12% 0.909 0.893 1.736 1.690 2.487 2.402 3.170 3.037 2.855 3.791 3.605 3.353 4.355 4.111 3.785 4.868 4.564 4.160 5.335 4.968 4.487 5.759 5.328 4.772 4.031 6.145 5.650 5.019 4.192 6% 12% 15% 20% 0.909 0.893 0.870 0.833 0.826 0.797 0.756 0.694 0.751 0.712 0.658 0.579 0.683 0.636 0.572 0.482 0.621 0.567 0.497 0.402 0.564 0.507 0.432 0.335 0.513 0.452 0.376 0.279 0.467 0.404 0.327 0.233 0.424 0.361 0.284 0.194 0.386 0.322 0.247 0.162 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 15% 20% 0.870 0.833 1.626 1.528 2.106 2.589 2.991 3.326 3.605 3.837 2.283 a. Determine the net present value of Project 1 over a 5-year life with residual value, assuming a minimum rate of return of 6%. If required, round to the nearest dollar. $ b. Which project provides the greatest net present value?
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:Net present value-unequal lives
Project 1 requires an original investment of $83,000.
The project will yield cash flows of $15,000 per year for
7 years. Project 2 has a computed net present value of
$19,600 over a 5-year life. Project 1 could be sold at the
end of 5 years for a price of $56,000.
Use the Present Value of $1 at Compound Interest
and the Present Value of an Annuity of $1 at
Compound Interest tables shown below.
Present Value of $1 at Compound Interest
10%
15%
20%
0.909
0.893
0.870 0.833
0.826
0.797 0.756 0.694
0.751 0.712 0.658
0.579
0.683
0.636
0.572
0.482
0.621
0.567
0.497
0.402
0.564
0.507
0.432
0.335
0.513
0.452
0.376
0.279
0.467 0.404
0.327 0.233
0.424
0.361
0.284
0.194
0.386
0.322 0.247 0.162
Year 6%
1
0.943
0.890
2
3
4
5
6
7
8
9
10
Year
1
2
3
4
5
6
7
8
9
10
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
12%
Present Value of an Annuity of $1 at
Compound Interest
10%
3.170
6%
12%
0.943
0.909 0.893
1.833
1.736
1.690
2.673
2.487
2.402
3.465
3.037
4.212
3.791
3.605
4.917
4.355 4.111
5.582
4.868
4.564
6.210
5.335
4.968
6.802
5.759
5.328
7.360 6.145
5.650
15%
0.870
1.626
2.283
20%
0.833
1.528
2.106
2.589
3.353
2.991
3.785
3.326
4.160 3.605
4.487 3.837
4.772
4.031
5.019
4.192
2.855
a. Determine the net present value of Project 1 over a
5-year life with residual value, assuming a minimum
rate of return of 6%. If required, round to the
nearest dollar.
$
b. Which project provides the greatest net present
value?
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