Pedro's Plumbing uses an interest rate of 20% to evaluate new invest- ment projects. The company is considering a new in-store security system for its Carlton Place branch. The system is budgeted to cost $654,900. The cost will be depreciated over its expected useful life of five years. The new system should increase cash flows by reducing stock shrinkage by $200,000 per year for five years. Because the project is considered to be low risk, it has been suggested that it be evaluated using an interest rate of 14%, not 20%. Required (a) Calculate the net present value at the normal rate of 20%. (b) Calculate the net present value at the low risk rate of 14%. (c) What would happen if the project were to be evaluated at a rate of 16%?

Pedro's Plumbing uses an interest rate of 20% to evaluate new invest- ment projects. The company is considering a new in-store security system for its Carlton Place branch. The system is budgeted to cost $654,900. The cost will be depreciated over its expected useful life of five years. The new system should increase cash flows by reducing stock shrinkage by $200,000 per year for five years. Because the project is considered to be low risk, it has been suggested that it be evaluated using an interest rate of 14%, not 20%. Required (a) Calculate the net present value at the normal rate of 20%. (b) Calculate the net present value at the low risk rate of 14%. (c) What would happen if the project were to be evaluated at a rate of 16%?

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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Appendix B Present value of $1, PV, PV = FV (1+ 0". Percent Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.879 0.773…
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