Below are two investment ideas to work with:
Use straight-line amortization in all calculations and exclude income taxes.
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IDEA ONE
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IDEA TWO
|
|
Initial capital investment
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$120,000
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$180,000
|
|
Estimated useful life
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3 years
|
3 years
|
|
Estimated terminal salvage value
|
0
|
0
|
|
Estimated annual savings in cash operating costs
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$50,000
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$80,000
|
|
Minimum desired rate of return
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10 %
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12 %
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Present Value of $1 (3 years)
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Present Value of an Annuity of $1 (3 years)
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|
8%
|
0.7938
|
2.5771
|
|
10%
|
0.7513
|
2.4869
|
|
12%
|
0.7118
|
2.4018
|
|
14%
|
0.6750
|
2.3216
|
|
16%
|
0.6407
|
2.2459
|
The net present value in IDEA ONE is
A) $4,345
B) $82,435
C) $50,000
D) $90
The net present value in IDEA TWO is
A) $80,000
B) $12,144
C) $-328 (negative amount)
D) $123,056
3. Using the Present Value table above, calculate the present value of 5-year annuity of $10,000 and an annual earning return of 8%.
A) $31,700
B) $34,700
C) $37,910
D) $39,930