Homework SourseFigure 1410 Present value of 1 Present value of an Annuity o
Figure 14-10.
Present value of $1
Present value of an Annuity of $1
Problem 14-12
Refer to Figure 14-10. Ray Corporation is looking to invest in a new piece of equipment. Two manufacturers of this type of equipment are being considered. After-tax inflows for the two competing projects are:
Both projects require an initial investment of $400,000. In both cases, assume that the equipment has a life of five years with no salvage value.
Required:
A. Assuming a discount rate of 8 percent, compute the net present value of each piece of equipment.
B. A third option is now available for a supplier outside of the country. The cost is also $400,000, but it will produce even cash flows over its five-year life. What must the annual cash flow be for this equipment to be selected over the other two? Assume an 8 percent discount rate.
$
| Periods | 4% | 6% | 8% | 10% | 12% | 14% |
| 1 | 0.962 | 0.943 | 0.926 | 0.909 | 0.893 | 0.877 |
| 2 | 0.925 | 0.890 | 0.857 | 0.826 | 0.797 | 0.769 |
| 3 | 0.889 | 0.840 | 0.794 | 0.751 | 0.712 | 0.675 |
| 4 | 0.855 | 0.792 | 0.735 | 0.683 | 0.636 | 0.592 |
| 5 | 0.822 | 0.747 | 0.681 | 0.621 | 0.567 | 0.519 |
| 6 | 0.790 | 0.705 | 0.630 | 0.564 | 0.507 | 0.456 |
| 7 | 0.760 | 0.665 | 0.583 | 0.513 | 0.452 | 0.400 |
| 8 | 0.731 | 0.627 | 0.540 | 0.467 | 0.404 | 0.351 |
| 9 | 0.703 | 0.592 | 0.500 | 0.424 | 0.361 | 0.308 |
| 10 | 0.676 | 0.558 | 0.463 | 0.386 | 0.322 | 0.270 |
Solution
SOLUTION:
1) Fallon equipment
Year
Cash Flow
Discount factor
PV
0
-400,000
1
-400,000
1
275,000
0.926
254,650
2
225,000
0.857
192,825
3
185,000
0.794
146,890
4
140,000
0.735
102,900
5
65,000
0.681
44,265
341,530
Toller Equipment Inc.
Year
Cash Flow
Discount factor
PV
0
-400,000
1
-400,000
1
70,000
0.926
64,820
2
70,000
0.857
59,990
3
285,000
0.794
226,290
4
330,000
0.735
242,550
5
390,000
0.681
265,590
459,240
2)
CF*3.993 - $400,000 = $459,240
CF*3.993 = $859,240
CF = $215,187
Thus, in order to supply outside the country the cash should be higher than $215,187
| Year | Cash Flow | Discount factor | PV |
| 0 | -400,000 | 1 | -400,000 |
| 1 | 275,000 | 0.926 | 254,650 |
| 2 | 225,000 | 0.857 | 192,825 |
| 3 | 185,000 | 0.794 | 146,890 |
| 4 | 140,000 | 0.735 | 102,900 |
| 5 | 65,000 | 0.681 | 44,265 |
| 341,530 | |||
