Figure 14-10.
Present value of $1
Present value of an Annuity of $1

-Refer to Figure 14-10. Ray Corporation is looking to invest in a new piece of equipment. Two manufacturers of this type of equipment are being considered. After-tax inflows for the two competing projects are:
Both projects require an initial investment of $400,000. In both cases, assume that the equipment has a life of 5 years with no salvage value.
Required:
A. Assuming a discount rate of 8%, compute the net present value of each piece of equipment.
B. A third option is now available for a supplier outside of the country. The cost is also $400,000, but it will produce even cash flows over its 5-year life. What must the annual cash flow be for this equipment to be selected over the other two? Assume an 8% discount rate.

Question

Figure 14-10.
Present value of $1
  Present value of an Annuity of $1
 
-Refer to Figure 14-10. Ray Corporation is looking to invest in a new piece of equipment. Two manufacturers of this type of equipment are being considered. After-tax inflows for the two competing projects are:
  Both projects require an initial investment of $400,000. In both cases, assume that the equipment has a life of 5 years with no salvage value.
Required:
A. Assuming a discount rate of 8%, compute the net present value of each piece of equipment.
B. A third option is now available for a supplier outside of the country. The cost is also $400,000, but it will produce even cash flows over its 5-year life. What must the annual cash flow be for this equipment to be selected over the other two? Assume an 8% discount rate.

Quizplus · Accepted Answer

The Answer of Figure 14-10.
Present value of $1
  Present value of an Annuity of $1
 
-Refer to Figure 14-10. Ray Corporation is looking to invest in a new piece of equipment. Two manufacturers of this type of equipment are being considered. After-tax inflows for the two competing projects are:
  Both projects require an initial investment of $400,000. In both cases, assume that the equipment has a life of 5 years with no salvage value.
Required:
A. Assuming a discount rate of 8%, compute the net present value of each piece of equipment.
B. A third option is now available for a supplier outside of the country. The cost is also $400,000, but it will produce even cash flows over its 5-year life. What must the annual cash flow be for this equipment to be selected over the other two? Assume an 8% discount rate.

Figure 14-10. Present Value of $1