The time value of money arises because a dollar today is worth more than a dollar tomorrow. Time
value of money is important for project evaluation as cash inflows and outflows occur at different points
in time – thus, we need to put these different cash flows on equal footing to compare them.
(1) Initial outlay, (2) estimated life and salvage value, (3) timing and amounts of operating cash flows,
and (4) cost of capital.
Net present value is the total present value of all cash inflows and outflows. We compute net present
value by discounting future cash inflows and outflows (using present value tables for our selected
discount rate) back into today’s dollars.
Treating each row of the table independently compute missing information.
For each setting, we use the appropriate present value factors from the tables in Appendix B.
The relevant table and the factor are given in parentheses for each setting.
(at the end of life)
(Table 2: Factor 1.611)
(Table 1: Factor 0.322)
By the definition of the internal rate of return, the net present value from investing in
injection molding machine should be zero. Referring to the solution to 11.37, the present
values of annuities of $90,600 over 10 years discounted at this rate should equal $500,000.
In other words,
$90,600 × annuity factor = $500,000, or annuity factor = 5.52.
Using the RATE(10, 90600, -500000) function of the Excel Spreadsheet, this annuity factor
corresponds to a discount rate of
We also can use the trial and error
method and the table in the Appendix to determine that the rate is between 12 and 13%.
This rate is less than 14%, and, as per company policy, this project would be rejected.