Asked by ThuveNdran Thuven10 on Jul 06, 2024
Verified
A new machine tool is expected to generate receipts as follows: $5,000 in year one; $3,000 in year two, nothing in the next year, and $2,000 in the fourth year. At an interest rate of 6%, what is the present value of these receipts? Is this a better present value than $2,500 each year over four years? Explain.
Present Value
The current worth of a future sum of money or stream of cash flows given a specified rate of return, used in financial analysis to assess investment opportunities.
Interest Rate
The percentage of a sum of money charged for its use, typically expressed as an annual percentage rate.
- Evaluate investment decisions using present value calculations.
Verified Answer
AG
Artur GertihJul 13, 2024
Final Answer :
5,000 × .943 + 3,000 × .890 + 2,000 × .792 = $8,969 using Table S7.1 in the text ($8,971.16 using Excel). The steady stream generates NPV of 2,500 × 3.465 = $8,662.5 ($8,662.76 using Excel). The irregular stream has the higher present value because the larger receipts are early.
Learning Objectives
- Evaluate investment decisions using present value calculations.