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Use the present and future value tables provided in this week’s reading to solve the situations depicted below: 1. Bob’s Music Store is doing well in the area. He has some excess cash in the bank account and is looking at different alternatives that might bring more return than the meager rate his bank is offering. He currently receives 2% interest from his bank, which we will use to determine the net present value of each alternative. He has narrowed it down to two options: Alternative A: The first option is to upgrade and customize his computer system. The cost will be $3,000. He expects to save $1,800 per year in labor costs as a result of the additional automation. He also believes he will be able to sell any computer hardware for $500 at the end of the 3-year horizon he is looking at before having to upgrade once again. Alternative B: The second option is to expand his current inventory by offering a new line of guitars. The initial outlay of the expansion is $8,000. He expects current annual sales of $80,000 to increase by 5% per year. In addition, he will have to pay $500 to renovate his current sales floor to accommodate the additional inventory. He is using the same 3-year horizon as in the first option. What is the net present value of each alternative? 2. Margo of Margo’s Curios is looking for ways to increase her sales and, hopefully, her net income. She is considering two alternatives which she believes will result in increased business. Her current investments earn 4% and she plans to use a 4-year horizon to determine the best approach. Option A: Her first option is to increase her current advertising expense of $1,800 per year by 15%. As a result, she expects her annual sales of $25,000 to increase by 2% and her annual labor cost of $4,800 to also increase by 2%. Option B: Her second option is to pay for a new website design. It will cost $300 up front and $300 per year in maintenance. She expects this to increase her annual sales by 2% per year. Calculate the net present value of each alternative.

Use the present and future value tables provided in this week’s reading to solve the situations depicted below: 1. Bob’s Music Store is doing well in the area. He has some excess cash in the bank account and is looking at different alternatives that might bring more return than the meager rate his bank is offering. He currently receives 2% interest from his bank, which we will use to determine the net present value of each alternative. He has narrowed it down to two options: Alternative A: The first option is to upgrade and customize his computer system. The cost will be $3,000. He expects to save $1,800 per year in labor costs as a result of the additional automation. He also believes he will be able to sell any computer hardware for $500 at the end of the 3-year horizon he is looking at before having to upgrade once again. Alternative B: The second option is to expand his current inventory by offering a new line of guitars. The initial outlay of the expansion is $8,000. He expects current annual sales of $80,000 to increase by 5% per year. In addition, he will have to pay $500 to renovate his current sales floor to accommodate the additional inventory. He is using the same 3-year horizon as in the first option. What is the net present value of each alternative? 2. Margo of Margo’s Curios is looking for ways to increase her sales and, hopefully, her net income. She is considering two alternatives which she believes will result in increased business. Her current investments earn 4% and she plans to use a 4-year horizon to determine the best approach. Option A: Her first option is to increase her current advertising expense of $1,800 per year by 15%. As a result, she expects her annual sales of $25,000 to increase by 2% and her annual labor cost of $4,800 to also increase by 2%. Option B: Her second option is to pay for a new website design. It will cost $300 up front and $300 per year in maintenance. She expects this to increase her annual sales by 2% per year. Calculate the net present value of each alternative.

Essentials Of Investments
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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Use the present and future value tables provided in this week’s reading to solve the situations depicted below: 1. Bob’s Music Store is doing well in the area. He has some excess cash in the bank account and is looking at different alternatives that might bring more return than the meager rate his bank is offering. He currently receives 2% interest from his bank, which we will use to determine the net present value of each alternative. He has narrowed it down to two options: Alternative A: The first option is to upgrade and customize his computer system. The cost will be $3,000. He expects to save $1,800 per year in labor costs as a result of the additional automation. He also believes he will be able to sell any computer hardware for $500 at the end of the 3-year horizon he is looking at before having to upgrade once again. Alternative B: The second option is to expand his current inventory by offering a new line of guitars. The initial outlay of the expansion is $8,000. He expects current annual sales of $80,000 to increase by 5% per year. In addition, he will have to pay $500 to renovate his current sales floor to accommodate the additional inventory. He is using the same 3-year horizon as in the first option. What is the net present value of each alternative? 2. Margo of Margo’s Curios is looking for ways to increase her sales and, hopefully, her net income. She is considering two alternatives which she believes will result in increased business. Her current investments earn 4% and she plans to use a 4-year horizon to determine the best approach. Option A: Her first option is to increase her current advertising expense of $1,800 per year by 15%. As a result, she expects her annual sales of $25,000 to increase by 2% and her annual labor cost of $4,800 to also increase by 2%. Option B: Her second option is to pay for a new website design. It will cost $300 up front and $300 per year in maintenance. She expects this to increase her annual sales by 2% per year. Calculate the net present value of each alternative.
Periods 1 12 13 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Interest Tables Used to Calculate Present and Future Values (The Time Value of Money) PRESENT VALUE TABLE Present Value of a Lump Sum Payment (Compound Interest) 19 20 1 2 13 4 5 6 7 18 Periods (n) 19 10 0 |1|2|3||5|6|7|1998 14 1% 2% 3% 20 Interest rates (r) 4% 5% 6% 7% 8% 9% 10% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.8570.842 0.826 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.5830.547 0.513 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.914 0.837 0.766 0.703 0.6450.592 0.544 0.500 0.460 0.424 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.853 0.728 0.623 0.534 0.458 0.394 0.3390.292 0.252 0.218 0.844 0.714 0.605 0.513 0.436 0.371 0.3170.270 0.2310.198 0.836 0.700 0.587 0.494 0.4160.350 0.296 0.250 0.212 0.180 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.820 0.673 0.554 0.456 0.377 0.3120.258 0.215 0.178 0.149 Interest rates (r) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.3123.240 3.170 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.6234.486 4.355 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.7475.535 5.335 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.1616.814 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.5598.061 7.606 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 15.562 14.292 13.166 12.166 11.274 10.4779.763 9.122 8.544 8.022 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 18.046 16.351 14.878 13.590 12.462 11.470 10.5949.8189.129 8.514 Present Value of a Periodic Payment (Annuity)
Transcribed Image Text:Periods 1 12 13 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Interest Tables Used to Calculate Present and Future Values (The Time Value of Money) PRESENT VALUE TABLE Present Value of a Lump Sum Payment (Compound Interest) 19 20 1 2 13 4 5 6 7 18 Periods (n) 19 10 0 |1|2|3||5|6|7|1998 14 1% 2% 3% 20 Interest rates (r) 4% 5% 6% 7% 8% 9% 10% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.8570.842 0.826 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.5830.547 0.513 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.914 0.837 0.766 0.703 0.6450.592 0.544 0.500 0.460 0.424 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.853 0.728 0.623 0.534 0.458 0.394 0.3390.292 0.252 0.218 0.844 0.714 0.605 0.513 0.436 0.371 0.3170.270 0.2310.198 0.836 0.700 0.587 0.494 0.4160.350 0.296 0.250 0.212 0.180 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.820 0.673 0.554 0.456 0.377 0.3120.258 0.215 0.178 0.149 Interest rates (r) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.3123.240 3.170 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.6234.486 4.355 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.7475.535 5.335 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.1616.814 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.5598.061 7.606 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 15.562 14.292 13.166 12.166 11.274 10.4779.763 9.122 8.544 8.022 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 18.046 16.351 14.878 13.590 12.462 11.470 10.5949.8189.129 8.514 Present Value of a Periodic Payment (Annuity)
Period 1% 6% 4% 10% 7% 8% 9% 1.0000 1.0200 1.0300 1.0400 1.0600 1.0700 1.0800 1.0900 1.1000 2% 1 3% 5% 1.0500 2 2.0100 2.0200 2.0300 2.0400 2.0500 2.0600 2.0700 2.0800 2.0900 2.1000 3 3.0301 3.0604 3.0909 3.1216 3.1525 3.1836 3.2149 3.2464 3.2781 3.3100 4 4.0604 4.1216 4.1836 4.2465 4.3101 4.3746 4.4399 4.5061 4.5731 4.6410 5 5.1010 5.2040 5.3091 5.4163 5.5256 5.6371 5.7507 5.8666 5.9847 6.1051 6 6.1520 6.3081 6.4684 6.6330 6.8019 6.9753 7.1533 7.3359 7.5233 7.7156 7 7.2135 7.4343 7.6625 7.8983 8.1420 8.3938 8.6540 8.9228 9.2004 9.4872 8 8.2857 8.5830 8.8923 9.2142 9.5491 9.8975 10.260 10.637 11.028 11.436 9 9.3685 9.7546 10.159 10.583 11.027 11.491 11.978 12.488 13.021 13.579 10 10.462 10.950 11.464 12.006 12.578 13.181 13.816 14.487 15.193 15.937 11 14.972 15.784 16.645 17.560 18.531 11.567 12.169 12.808 13.486 14.207 12 12.683 13.412 14.192 15.026 15.917 16.870 17.888 18.977 20.141 21.384 13 13.809 14.680 15.618 16.627 17.713 18.882 20.141 21.495 22.953 24.523 14 14.947 15.974 17.086 18.292 19.599 21.015 22.550 24.215 26.019 27.975 15 16.097 17.293 18.599 20.024 21.579 23.276 25.129 27.152 29.361 31.772 16 17.258 18.639 20.157 21.825 23.657 25.673 27.888 30.324 33.003 35.950 17 18.430 20.012 21.762 23.698 25.840 28.213 30.840 33.750 36.974 40.545 18 19.615 21.412 23.414 25.645 28.132 30.906 33.999 37.450 41.301 45.599 19 20.811 22.841 25.117 27.671 30.539 33.760 37.379 41.446 46.018 51.159 20 22.019 24.297 26.870 29.778 33.066 36.786 40.995 45.762 51.160 57.275 24 26.973 30.422 34.426 39.083 44.502 50.816 58.177 66.765 76.790 88.497 36 43.077 51.994 63.276 77.598 95.836 119.121 148.913 187.102 236.125 299.127 Future Value of an Annuity
Transcribed Image Text:Period 1% 6% 4% 10% 7% 8% 9% 1.0000 1.0200 1.0300 1.0400 1.0600 1.0700 1.0800 1.0900 1.1000 2% 1 3% 5% 1.0500 2 2.0100 2.0200 2.0300 2.0400 2.0500 2.0600 2.0700 2.0800 2.0900 2.1000 3 3.0301 3.0604 3.0909 3.1216 3.1525 3.1836 3.2149 3.2464 3.2781 3.3100 4 4.0604 4.1216 4.1836 4.2465 4.3101 4.3746 4.4399 4.5061 4.5731 4.6410 5 5.1010 5.2040 5.3091 5.4163 5.5256 5.6371 5.7507 5.8666 5.9847 6.1051 6 6.1520 6.3081 6.4684 6.6330 6.8019 6.9753 7.1533 7.3359 7.5233 7.7156 7 7.2135 7.4343 7.6625 7.8983 8.1420 8.3938 8.6540 8.9228 9.2004 9.4872 8 8.2857 8.5830 8.8923 9.2142 9.5491 9.8975 10.260 10.637 11.028 11.436 9 9.3685 9.7546 10.159 10.583 11.027 11.491 11.978 12.488 13.021 13.579 10 10.462 10.950 11.464 12.006 12.578 13.181 13.816 14.487 15.193 15.937 11 14.972 15.784 16.645 17.560 18.531 11.567 12.169 12.808 13.486 14.207 12 12.683 13.412 14.192 15.026 15.917 16.870 17.888 18.977 20.141 21.384 13 13.809 14.680 15.618 16.627 17.713 18.882 20.141 21.495 22.953 24.523 14 14.947 15.974 17.086 18.292 19.599 21.015 22.550 24.215 26.019 27.975 15 16.097 17.293 18.599 20.024 21.579 23.276 25.129 27.152 29.361 31.772 16 17.258 18.639 20.157 21.825 23.657 25.673 27.888 30.324 33.003 35.950 17 18.430 20.012 21.762 23.698 25.840 28.213 30.840 33.750 36.974 40.545 18 19.615 21.412 23.414 25.645 28.132 30.906 33.999 37.450 41.301 45.599 19 20.811 22.841 25.117 27.671 30.539 33.760 37.379 41.446 46.018 51.159 20 22.019 24.297 26.870 29.778 33.066 36.786 40.995 45.762 51.160 57.275 24 26.973 30.422 34.426 39.083 44.502 50.816 58.177 66.765 76.790 88.497 36 43.077 51.994 63.276 77.598 95.836 119.121 148.913 187.102 236.125 299.127 Future Value of an Annuity
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