Question

1. Determine which of two investment projects a manager should choose if the discount rate for the firm is 6 percent. The first project promises a profit of $500,000 in each of the next five years, which the second project promises a profit of $160,000 in each of the next 20 years. Note: To avoid numerous repetitive calculations, use the present value of annuities table in Appendix B

• For problems 1 & 2 see present value material on p. 12. Present value tables are available in Appendix B of the text.

each of the next 20 years. Note: To avoid numerous repetitive calculations, use the present value of annuities table in Appendix B

Answer 1

PV for project 1:

PV = [500,000 / (1.06)] + [ 500,000 / (1.06²)] + [ 500,000 / (1.06³)] + [ 500,000 / (1.06⁴)] + [ 500,000 / (1.06⁵)]

PV = $2,106,181.89

PV for project 2:

PV = [160,000 / (1.06)] + [ 160,000 / (1.06²)] + [ 160,000 / (1.06³)] +....+ [ 160,000 / (1.06¹⁹)] + [ 160,000 / (1.06²⁰)]

PV = $1,835,187.39

As the PV for project 1 is higher than project 2 so manager should choose project 1.