Managerial Accounting
5th Edition
ISBN: 9781259176494
Author: John J Wild, Ken Shaw Accounting Professor
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter B, Problem 4QS
To determine
Present Value:
Present value of money means the present or current value of a future
Future Value:
The future value is the value of present cash flow at specified time period and at specified
We have to determine the amount to be invested.
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An investor has developed projections for an investment that will generate the following stream of future cash flows: Yr1 = 50, Yr2 = 60, Yr3 = 75, Yr4 = 80, Yr5 = 90. She believes that she can invest her money at 10 percent annually.
How much will she have accumulated by the fifth year of this investment?
Suppose you invest $3,000 today and receive $10,000 in 25 years.
a. What is the internal rate of return (IRR) of this opportunity?
b. Suppose another investment opportunity also requires $3,000 upfront, but pays an equal amount at the end of each year for the next 25 years. If this investment has the same IRR as the first one, what is the
amount you will receive each year?
a. What is the internal rate of return (IRR) of this opportunity?
The IRR of this opportunity is%. (Round to two decimal places.)
b. Suppose another investment opportunity also requires $3,000 upfront, but pays an equal amount at the end of each year for the next 25 years. If this investment has the same IRR as the first one, what is the
amount you will receive each year?
The periodic payment that gives the same IRR is $
(Round to the nearest cent.)
You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from
now, $1,500 two years from now, and $10,000 ten years from now.
a. What is the NPV of the investment opportunity if the interest rate is 8% per year? Should you take the opportunity?
b. What is the NPV of the investment opportunity if the interest rate is 4% per year? Should you take the opportunity?
a. What is the NPV of the investment opportunity if the interest rate is 8% per year?
The NPV of the investment opportunity if the interest rate is 8% per year is $. (Round to the nearest dollar.)
Should you take the investment opportunity (Select the best choice below.)
A. Reject it because the NPV is less than 0.
B. Take it because the NPV is equal to or greater than 0.
b. What is the NPV of the investment opportunity if the interest rate is 4% per year?
The NPV of the investment opportunity if the interest rate is 4% per year is $
(Round to the nearest dollar.)
Should…
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- Kant Miss Company is promising its investors that it will double their money every 4 years. What annual rate is Kant Miss promising? Is this investment a good deal? If you invest $450 now and Kant Miss is able to deliver on its promise, how long will it take your investment to reach $28,000? Using the time value of money equation, what annual rate is Kant Miss promising?arrow_forwardWhat will be the better option, receive 100,000 now or receive 250,000 six years from now? The available investment opportunities provide a 7% rate of returnarrow_forwardAssume the annual effective interest rate is i = 2%. An individual wants to invest a capital of £100,000 and is contemplating two projects:Project A. She buys a property for exactly £100,000 at time t = 0 that will generate income from rent. a)If rent is paid monthly in advance and each payment is £700, how long will it take before the present value of rental payments exceeds the initial cost of purchasing the property? b)To be more realistic assume that rent increases every three years at a rate of 1% effective per annum compound, and taxes are paid at 20% on rental income. Moreover, maintenance work for the property will cost £1,500 to be paid at the end of every 5 years (and these are not subject to tax relief). If rental payments stop after 15 years, what is the net present value (at time t = 0) of all cash flows for 15 years? (Include maintenance costs paid at t = 15 years.)arrow_forward
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