You have been asked by Transport for London Ltd. to design a new and more efficient component for the signaling system of the London Underground. The engineers and other experts you consulted have come up with four possible projects for its production. All costs and revenues for the two possibilities are represented by the patterns of after-tax cash flows as follow (assume no uncertainty): Projects Initial investment Cash flow Cash flow Cash flow Cash flow Cash flow Year A. B. 0 1 2 3 4 5 A -9 2 2.5 3 3.5 4 B -9 4 3.5 3 2.5 2 C -9 3 3 3 3 3 D -9 0.7 0.7 0.7 0.7 forever For all projects, the appropriate cost of capital is 6%. Calculate the Net Present Value for each project using the most appropriate formulae. [Practice using Excel for your calculations, although of course for the exam you will not have Excel!]. Which project would you choose and why? Project D seems the best project because it generates positive cash flows forever. Do your calculations confirm this? Why?
You have been asked by Transport for London Ltd. to design a new and more efficient component for the signaling system of the London Underground. The engineers and other experts you consulted have come up with four possible projects for its production. All costs and revenues for the two possibilities are represented by the patterns of after-tax cash flows as follow (assume no uncertainty): Projects Initial investment Cash flow Cash flow Cash flow Cash flow Cash flow Year A. B. 0 1 2 3 4 5 A -9 2 2.5 3 3.5 4 B -9 4 3.5 3 2.5 2 C -9 3 3 3 3 3 D -9 0.7 0.7 0.7 0.7 forever For all projects, the appropriate cost of capital is 6%. Calculate the Net Present Value for each project using the most appropriate formulae. [Practice using Excel for your calculations, although of course for the exam you will not have Excel!]. Which project would you choose and why? Project D seems the best project because it generates positive cash flows forever. Do your calculations confirm this? Why?
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
Related questions
Question
Transcribed Image Text:Table 1: Present value factors
To determine the present value of a single payment received 'n' years from the present
(or vice versa)
Periods
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Periods
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
6%
9%
0.9434
0.9174
0.8900 0.8417
0.8396
0.7921
0.7473 0.6499
0.7050
0.5963
0.6651
0.5470
16
17
18
19
20
0.6274
0.5019
0.5919 0.4604
0.5584 0.4224
0.5268
0.3875
0.4970 0.3555
0.4688
0.3262
0.4423
0.2992
0.4173 0.2745
0.3936
0.2519
0.3714
0.2311
0.3503
0.2120
0.3305 0.1945
0.3118 0.1784
10%
0.9091
0.8264
0.7513
0.7722
0.7084 0.6830 0.6355
0.6209
0.5645
0.5132
0.4665
0.4241
0.2255 0.1938
0.3855
0.1911
0.3505
0.2875
0.2149
0.1954 0.1619
0.3186 0.2567
0.1869
0.1685 0.1372
0.2897
0.2292
0.1625
0.1452 0.1163
0.2633
0.2046 0.1413
0.1252 0.0985
0.2394
0.1827
0.1229
0.1079 0.0835
0.2176 0.1631
0.0930 0.0708
0.1069
0.0929 0.0802 0.0600
0.1978
0.1456
0.1799 0.1300 0.0808 0.0691 0.0508
0.1635 0.1161 0.0703 0.0596 0.0431
0.1486 0.1037 0.0611 0.0514 0.0365
12%
15%
0.8929
0.8696
0.7972
0.7561
0.7118 0.6575
9%
0.9174
16%
18%
0.8621
0.8475
0.7432
0.7182
0.6407 0.6086
0.5718
0.5674 0.4972
0.5066
0.4323
0.4523
0.4039
0.3606
0.3220
Table 2: Cumulative present value factors
('annuity factors')
The table gives the present value of 'n' annual payments of 1 received for the next 'n' years with
a constant discount of x% per year. For example, with a discount rate of 8% and with 6 annual
payments of £1 the present value is £4.6229
6.4951
6.8137
0.5523
0.5158
0.4761 0.4371
0.4104 0.3704
0.3139
0.3050 0.2660
0.2630
0.2267
0.3759 0.3538
0.3269
0.2843
0.2472
20%
0.8333
0.6944
0.5787
0.4823
0.4019
0.3349
15%
16%
18%
0.8696 0.8621 0.8475
1.6257 1.6052 1.5656
2.2832 2.2459
2.1743
2.8550 2.7982
2.6901
3.3522 3.2743
3.1272
3.7845 3.6847
3.4976
4.1604
4.4873
4.7716
5.0188 4.8332 4.4941
4.6065 4.3030
5.2337 5.0286 4.6560
5.4206
5.5831 5.3423
0.2791
0.2326
4.0386 3.8115
4.3436 4.0776
6%
10%
12%
0.9434
1.8334 1.7591
2.6730 2.5313
0.9091
0.8929
1.7355 1.6901
2.4869 2.4018
3.4651 3.2397
3.1699 3.0373
4.2124 3.8897 3.7908 3.6048
4.9173 4.4859 4.3553 4.1114
5.5824 5.0330
4.8684
4.5638
6.2098 5.5348 5.3349 4.9676
6.8017 5.9952 5.7590 5.3282
7.3601 6.4177 6.1446 5.6502
3.8372
4.0310
4.1925
7.8869
6.8052
5.9377
4.3271
8.3838 7.1607
6.1944
5.1971 4.7932 4.4392
8.8527
7.1034 6.4235
4.9095 4.5327
7.4869
9.2950 7.7862
7.3667 6.6282
5.7245 5.4675
5.0081
4.6106
5.5755
5.0916
4.6755
5.6685 5.1624
4.7296
9.7122 8.0607 7.6061 6.8109 5.8474
10.1059 8.3126 7.8237 6.9740 5.9542
10.4773 8.5436 8.0216 7.1196
6.0472
10.8276 8.7556 8.2014 7.2497 6.1280 5.8178
11.1581 8.9501 8.3649 7.3658 6.1982 5.8775 5.3162
5.7487 5.2223
4.7746
5.2732
4.8122
11.4699 9.1285
8.5136 7.4694
0.1615
0.1346
0.1122
0.0935
0.0779
0.0649
0.0541
0.0451
0.0376
0.0313
0.0261
20%
0.8333
1.5278
2.1065
2.5887
2.9906
3.3255
3.6046
4.8435
6.2593 5.9288 5.3527 4.8696
![Question 1 (at home, to practice)
You have been asked by Transport for London Ltd. to design a new and more efficient component for the
signaling system of the London Underground. The engineers and other experts you consulted have come
up with four possible projects for its production. All costs and revenues for the two possibilities are
represented by the patterns of after-tax cash flows as follow (assume no uncertainty):
Projects
Initial
investment
Cash flow
Cash flow
Cash flow
Cash flow
Cash flow
Year
A.
B.
012345
A
Air wir Nó
-9
2
2.5
3.5
4
B
9453
-9
3.5
2.5
C
-9
ن من من من من
3
3
3
D
-9
0.7
0.7
0.7
0.7
forever
For all projects, the appropriate cost of capital is 6%. Calculate the Net Present Value for each project
using the most appropriate formulae.
[Practice using Excel for your calculations, although of course for the exam you will not have Excel!].
Which project would you choose and why?
Project D seems the best project because it generates positive cash flows forever. Do your
calculations confirm this? Why?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb6fb39b4-c3dd-459e-8fd8-159157b89dba%2Ffa1ad0c2-98ab-4b22-ba9d-d77c676fbec4%2Fqz5xnc_processed.png&w=3840&q=75)
Transcribed Image Text:Question 1 (at home, to practice)
You have been asked by Transport for London Ltd. to design a new and more efficient component for the
signaling system of the London Underground. The engineers and other experts you consulted have come
up with four possible projects for its production. All costs and revenues for the two possibilities are
represented by the patterns of after-tax cash flows as follow (assume no uncertainty):
Projects
Initial
investment
Cash flow
Cash flow
Cash flow
Cash flow
Cash flow
Year
A.
B.
012345
A
Air wir Nó
-9
2
2.5
3.5
4
B
9453
-9
3.5
2.5
C
-9
ن من من من من
3
3
3
D
-9
0.7
0.7
0.7
0.7
forever
For all projects, the appropriate cost of capital is 6%. Calculate the Net Present Value for each project
using the most appropriate formulae.
[Practice using Excel for your calculations, although of course for the exam you will not have Excel!].
Which project would you choose and why?
Project D seems the best project because it generates positive cash flows forever. Do your
calculations confirm this? Why?
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