The Following Data Have Been Gathered for a Capital Investment

question 97

Essay

The following data have been gathered for a capital investment decision. The amounts relate to a 14 percent discount factor.
$$\begin{array} { c c c } \text { End of Perind } & \text { Present Value af } \$ 1 & \text { Present Value af an Annuity af } \$ 1 \\1 & .877 & .877 \\2 & .769 & 1.646 \\3 & .675 & 2.321 \\4 & .592 & 2.913 \\5 & .519 & 3.432 \\6 & .456 & 3.888\end{array}$$
a. Compute the present value of the following cash flows. Use a discount rate of 14 percent.
$$\begin{array} { l r } \text { Year 1 } & \$ 50,000 \\\text { Year 2 } & 60,000 \\\text { Year 3 } & 40,000 \\\text { Year 4 } & 50,000 \\\text { Year 5 } & 40,000\end{array}$$
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.

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Definitions:

Random Factor

A random factor is an unpredictable variable that can influence the outcome of an experiment or situation, often beyond control.

Dependent Variable

In research, the variable being tested and measured, expected to be influenced by another variable known as the independent variable.

Self-Report Biases

Distortions in self-report measures due to systematic differences between what respondents report and what is true, often driven by social desirability or memory inaccuracies.

Placebo Effects

Phenomena where an individual experiences a beneficial effect from a treatment that has no therapeutic properties, due to their belief that they are receiving an active treatment.