The Following Data Have Been Gathered for a Capital Investment

question 112

Essay

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

Rate of Decrease

A measure that indicates how quickly a quantity diminishes over time.

Base Value

A reference point used in the calculation of variables, such as index numbers, from a specific base date.

Percentage

A fraction or ratio expressed as a part of 100, used to denote proportion or comparison between quantities.

Missing Value

An absent data point or entry in a dataset, which may occur for various reasons and can impact the analysis if not properly handled.