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Chapter 26: Q18RQ (page 1464)

Explain the difference between the present value factor tables—Present Value of \(1 and Present Value of Ordinary Annuity of \)1.

Short Answer

Expert verified

PV=FV1(1+r)n

Step by step solution

01

Meaning of Present Value

A money-related calculation gauge of the worth of a future amount of cashor stream of installments in today's dollars adjusted for interest and inflation is known as present value. In other words, it compares the acquiring control of a future dollar to that of a current dollar.

02

Difference between the present value factor tables-Present Value of $1 and Present Value of Ordinary Annuity of $1

The Present Value of $1 tableis used to calculate the value today of one future amount (a lump sum). The Present Value of an Annuity of $1 is used to calculate the value today of a series of equal future amounts (an annuity).

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Most popular questions from this chapter

What is the profitability index? When is it used?

Hicks Company is considering an investment opportunity with the following expected net cash inflows: Year 1, \(235,000; Year 2, \)195,000; Year 3, \(125,000. The company uses a discount rate of 6%, and the initial investment is \)365,000. Calculate the NPV of the investment. Should the company invest in the project? Why or why not?

Refer to Short Exercise S26-4. Continue to assume that the expansion has no residual value. What is the project’s IRR? Is the investment attractive? Why or why not?

Explain the difference between capital assets, capital investments, and capital budgeting.

P26-40 Using payback, ARR, NPV, and IRR to make capital investment decisions

This problem continues the Piedmont Computer Company situation from Chapter 25. Piedmont Computer Company is considering purchasing two different types of servers. Server A will generate net cash inflows of \(25,000 per year and have a zero residual value. Server A’s estimated useful life is three years, and it costs \)45,000. Server B will generate net cash inflows of \(25,000 in year 1, \)15,000 in year 2, and \(5,000 in year 3. Server B has a \)5,000 residual value and an estimated useful life of three years. Server B also costs $45,000. Piedmont Computer Company’s required rate of return is 14%.

Requirements

1. Calculate payback, accounting rate of return, net present value, and internal rate of return for both server investments. Use Microsoft Excel to calculate NPV and IRR.

2. Assuming capital rationing applies, which server should Piedmont Computer Company invest in?
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