Figure 14-11. Present Value of an Annuity of $1 in Arrears

question 169

Essay

Figure 14-11.
Present value of an Annuity of $1 in Arrears

-Refer to Figure 14-11. Aragon Company is considering an investment in equipment that will have an initial cost of $560,290 and yield annual net cash inflows of $90,000. Yearly depreciation will be $56,000. The equipment is expected to be useful for 10 years and then it will be scrapped. Aragon requires a minimum rate of return of 10%.

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Definitions:

Compounded Semiannually

Refers to the process of calculating and adding interest to the principal balance of an investment or loan twice a year.

Strip Bond

A fixed-income security derived from the separation of the coupons from the principal of a bond, which are then sold separately as zero-coupon bonds.

Compounded Semiannually

A method of calculating interest where the accrued interest is added to the principal sum and interest is then calculated on the new total twice a year.

Monthly Compounded

Interest calculation in which the interest is added to the principal balance monthly, allowing earnings to increase at a faster rate compared to annual compounding.