The Following Data Have Been Gathered for a Capital Investment

question 105

Essay

The following data have been gathered for a capital investment decision.The amounts relate to a 14 percent discount factor.
$\begin{array}{ccc}\text { End of Period } & \text { Present Value of \$1 } & \text { Present Value of an Annuity of \$1 } \\1 & .877 & .877 \\2 & .769 & 1.646 \\3 & .675 & 2.321 \\4 & .592 & 2.913 \\5 & .519 & 3.432 \\6 & .456 & 3.888\end{array}$
a. Compute the present value of the following cash flows. Use a discount rate of 14 percent.

b. What would have been the present value of the cash flows if they were received in equal installments over the five-year period at the same discount rate?
c. If the answers to parts (a) and (b) differ, explain the reason(s) why.

---

Definitions:

FV

Future Value, the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.

Compound Interest

Interest calculated on the initial principal of a deposit or loan, as well as on the accumulated interest from previous periods.

Interest on Interest

The interest earned on the reinvestment of previous interest payments, commonly associated with compounding interest.

Reinvestment

The process of using dividends, interest, or any form of return earnings to purchase additional shares or units instead of receiving the earnings in cash.