Figure 14-10
Present Value of $1 Present Value of an Annuity of $1

question 71

Essay

Figure 14-10
Present value of $1 $\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 0.925 & 0.890 & 0.857 & 0.826 & 0.797 & 0.769 \\\hline 3 & 0.889 & 0.840 & 0.794 & 0.751 & 0.712 & 0.675 \\\hline 4 & 0.855 & 0.792 & 0.735 & 0.683 & 0.636 & 0.592 \\\hline 5 & 0.822 & 0.747 & 0.681 & 0.621 & 0.567 & 0.519 \\\hline 6 & 0.790 & 0.705 & 0.630 & 0.564 & 0.507 & 0.456 \\\hline 7 & 0.760 & 0.665 & 0.583 & 0.513 & 0.452 & 0.400 \\\hline 8 & 0.731 & 0.627 & 0.540 & 0.467 & 0.404 & 0.351 \\\hline 9 & 0.703 & 0.592 & 0.500 & 0.424 & 0.361 & 0.308 \\\hline 10 & 0.676 & 0.558 & 0.463 & 0.386 & 0.322 & 0.270 \\\hline\end{array}$ Present value of an annuity of $1 $\begin{array}{|c|l|l|l|l|l|l|}\hline \text { Periods } & 4 \% & 6 \% & 8 \% & 10 \% & 12 \% & 14 \% \\\hline 1 & 0.962 & 0.943 & 0.926 & 0.909 & 0.893 & 0.877 \\\hline 2 & 1.886 & 1.833 & 1.783 & 1.736 & 1.690 & 1.647 \\\hline 3 & 2.775 & 2.673 & 2.577 & 2.487 & 2.402 & 2.322 \\\hline 4 & 3.630 & 3.465 & 3.312 & 3.170 & 3.037 & 2.914 \\\hline 5 & 4.452 & 4.212 & 3.993 & 3.791 & 3.605 & 3.433 \\\hline 6 & 5.242 & 4.917 & 4.623 & 4.355 & 4.111 & 3.889 \\\hline 7 & 6.002 & 5.582 & 5.206 & 4.868 & 4.564 & 4.288 \\\hline 8 & 6.733 & 6.210 & 5.747 & 5.335 & 4.968 & 4.639 \\\hline 9 & 7.435 & 6.802 & 6.247 & 5.759 & 5.328 & 4.946 \\\hline 10 & 8.111 & 7.360 & 6.710 & 6.145 & 5.650 & 5.216 \\\hline\end{array}$
-Refer to Figure 14-10.Marousis Company is considering an investment that will have an initial cost of $1,000,000 yield annual net cash inflows of $260,000.Yearly depreciation will be $200,000.The equipment is expected to be useful for five years,at which point it will be scrapped with no salvage value.Marousis requires a minimum rate of return of 10%. A. What is the accounting rate of return?
B. What is the net present value? Is the investment acceptable?
C. Now suppose that Marousis believes it can sell the equipment at the end of five years for
$\$ 100,000$ . What is the net present value? Is the investment acceptable?
D. What can you say about the IRR in the first case (no salvage value) versus the IRR
in the second case (\$100,000 salvage value)?

Learn how the net present value (NPV) is determined and its implications for capital budgeting decisions.

Comprehend the significance of the minimum required rate of return in project evaluation.

Grasp the principles and limitations of the payback method in project assessment.

Recognize the assumptions underlying the internal rate of return and net present value methods regarding reinvestment rates.

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