Warr22e_IM_TM_Ch26 - Transparency Master 26-1 INVESTMENT ANALYSIS Cost Expected life Expected residual value Project A Project B $560,000 $900,000 4

Warr22e_IM_TM_Ch26 - Transparency Master 26-1 INVESTMENT...

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Transparency Master 26-1INVESTMENT ANALYSISProject AProject BCost.........................................................$560,000$900,000Expected life..........................................4 years4 yearsExpected residual value.......................$0$0Project AProject BNetNetExpected returnsIncomeCash FlowIncomeCash FlowYear 1$10,000$150,000$100,000$325,000Year 250,000190,000100,000325,000Year 380,000220,000100,000325,000Year 484,000224,000100,000325,000
Transparency Master 26-2PRESENT VALUE PROBLEMS1.What is the present value of $1,000,000 to be re-ceived 10 years from now, with interest compoun-ded at 15% annually?2.What is the present value of an annuity of $10,000 for 5 years at 12%?3.How much cash would you need to invest in a money market account today in order to have $8,000 at the end of four years? Assume interest rates are 6%.4.How much cash would you need to invest in a money market account today in order to be able to withdraw $8,000 per year at the end of each of the next four years? Assume interest rates are 6%?5.Assume you won the grand prize in a sweepstakes. Would it be better to take your prize in $100,000 payments each year over the next ten years or $600,000 now? Interest rates are 10%.
Transparency Master 26-3PRESENT VALUE PROBLEMSSolution

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