Tut_Ch_5_Part_1 - TUTORIAL 1. BAC1644 Ch 5 Part 1 To solve...

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TUTORIAL BAC1644 Ch 5 Part 1 1. To solve this problem, we must find the PV of each cash flow and add them. To find the PV of a lump sum, we use: PV = FV / (1 + r) t PV@10% = $950 / 1.12 + $730 / 1.12 2 + $1,420 / 1.12 3 + $1,780 / 1.12 4 = $3,572.12 PV@18% = $950 / 1.18 + $730 / 1.18 2 + $1,420 / 1.18 3 + $1,780 / 1.18 4 = $3,111.72 PV@24% = $950 / 1.24 + $730 / 1.24 2 + $1,420 / 1.24 3 + $1,780 / 1.24 4 = $2,738.56 2. To find the PVA, we use the equation: PVA = C ({1 – [1/(1 + r ) t ]} / r ) At a 6 percent interest rate: X@6%: PVA = $4,400{[1 – (1/1.06) 9 ] / .06 } = $29,927.45 Y@6%: PVA = $6,100{[1 – (1/1.06) 5 ] / .06 } = $25,695.42 And at a 22 percent interest rate: X@22%: PVA = $4,400{[1 – (1/1.22) 9 ] / .22 } = $16,659.65 Y@22%: PVA = $6,100{[1 – (1/1.22) 5 ] / .22 } = $17,468.20 Notice that the PV of Investment X has a greater PV at a 6 percent interest rate, but a lower PV at a 22 percent interest rate. The reason is that X has greater total cash flows. At a lower interest rate, the total cash flow is more important since the cost of waiting (the interest rate) is not as great. At a higher interest rate, Y is more valuable since it has larger annual payments. At a higher interest rate,
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This note was uploaded on 01/14/2012 for the course ACCOUNT 102 taught by Professor Adams during the Spring '11 term at Bradford School of Business.

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Tut_Ch_5_Part_1 - TUTORIAL 1. BAC1644 Ch 5 Part 1 To solve...

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