Question

Exercise 14: Capital Investment Analysis Use the table shown below to calculate the present value of $40,000 received five years from now. Asume a 10% interest rate Present Value of $1 at Compound Interest 101 15% 0.870 0.006 0.756 0.751 0.721 0.658 0.683 0.522 0.621 0.567 0.497 0.564 0.507 0432 0.513 0.452 0.376 0.467 0.404 0.327 0.424 0.361 0.284 0.386 0.322 0.247 Exercise NIS: Capital Investment Analysis North End Co. is considering a new project which will earn $325,142 of total income over the next five years. The cost to start the project totals 5525,200, and it will have a $21,343 salvage Value Calculate the average rate of return for the project, founding percentages to the rest whole percentage

Answer 1

Exercise 4:

Present value of $40000 received five years from now = $24840

Solution:

Present value of $40000 received five years from now = $40000 * present value factor at 10% for five years

= $40000 * 0.621

= $24840

Note: calculation of present value factor at 10% for five years

present value factor = 1/(1+r)ⁿ

where, r = rate of interest and n = number of years

present value factor at 10% for five years = 1/(1+0.1)⁵

= 1/(1.1)⁵

= 1/(1.6105)

= 0.6209

= 0.621

Exercise 5:

Average rate of returns = 26%

Solution:

Average rate of returns = Average profit/Average investment

where,

Average profit = total profit / number of years

= $325342 / 5 years

= $65068.4 per year

Average investment = (Initial investment - salvage value) / 2

= ($525200 - $21343) / 2

= $503857 / 2

= $251928.5

therefore,

Average rate of returns = $65068.4 / $251928.5

= 0.258

= 26%