1.The following data have been gathered for a capital investment decision.
|
Cash inflows:
Year 1
|
$50,000
|
|
Year 2
|
60,000
|
|
Year 3
|
40,000
|
|
Year 4
|
50,000
|
|
Year 5
|
40,000
|
The minimum rate of return for this investment is 14 percent. The present value factors for a 14 percent discount rate are as follows:
|
End of Period
|
Present Value of $1
|
Present Value of an Annuity of $1
|
|
1
|
.877
|
.877
|
|
2
|
.769
|
1.646
|
|
3
|
.675
|
2.321
|
|
4
|
.592
|
2.913
|
|
5
|
.519
|
3.432
|
|
6
|
.456
|
3.888
|
a.Compute the present value of each of the cash inflows of the investment.
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? (Assume the total cash inflows remain same.)
c.If the answers to parts (a) and (b) differ, explain the reason(s) why.