Figure 14-6. Present value of $1
Present value of an Annuity of $1
Refer to Figure 14-6.Jan Rigby is considering an investment that will cost $20,000 initially,and return annual cash flows of $10,000 in each of three years.Jan requires a minimum rate of return of 8 percent.What is the present value of the cash inflows? (Note: there may be a rounding error depending on the table you use to compute your answer.Choose the answer closest to the one you calculate.)

Question

Figure 14-6. Present value of $1
 Present value of an Annuity of $1
 Refer to Figure 14-6.Jan Rigby is considering an investment that will cost $20,000 initially,and return annual cash flows of $10,000 in each of three years.Jan requires a minimum rate of return of 8 percent.What is the present value of the cash inflows? (Note: there may be a rounding error depending on the table you use to compute your answer.Choose the answer closest to the one you calculate.)

Quizplus · Accepted Answer

To find the present value of the cash inflows, we need to use the Present Value of an Annuity of $1 table in Figure 14-6. We will use the row for 8% and the column for three years. We can see that the factor is 2.577.

Next, we multiply the annual cash flow of $10,000 by the factor of 2.577 to get the present value of the annuity:

Present Value = $10,000 x 2.577 = $25,770.

Finally, we subtract the initial cost of $20,000 to get the net present value:

Net Present Value = $25,770 - $20,000 = $5,770.

Therefore, the best choice is A) $25,770 with the explanation that we used the Present Value of an Annuity of $1 table to calculate the present value of the cash inflows and then subtracted the initial cost to find the net present value.

Figure 14-6. Present Value of $1