CHAPTER 6 Making Investment Decisions with the Net Present Value Rule Answers to Problem Sets 1. a‚ b‚ d‚ g‚ h; c is a sunk cost. e is an overhead cost. f is not an incremental cash flow because depreciation is not a cash flow. i is a sunk cost. Est. Time: 01 - 05 2. Real cash flow = 100‚000/1.04 = $96‚154. The real discount rate is calculated as 1 + nominal rate / 1+ inflation rate − 1. Therefore‚ 1.08/1.04 − 1 = .03846. PV = [pic] Est
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Chapter 09 The Time Value of Money Answer Key True / False Questions 1. An amount of money to be received in the future is worth less today than the stated amount. TRUE 2. Discounting refers to the growth process that turns $1 today into a greater value several periods in the future. FALSE 3. Compounding refers to the growth process that turns $1 today into a greater value several periods in the future. TRUE 4. The interest factor for the future value of a single sum is equal to (1
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the person holds today is worth more because it can be invested and earn interest (Web Finance‚ Inc.‚ 2007). The following paper will explain how annuities affect TVM problems and investment outcomes. The issues that impact TCM will also be discussed: Interest rates and compounding (with two problems)‚ present value‚ future value‚ opportunity cost‚ annuities and the rule of ’72. The idea of TVM allows managers or investors the capability to understand the advantages and future cash flow of the cost
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INTRODUCTION: This project is between NHAI and M/s.Patel KNR Heavy Infrastructures Pvt. Ltd. on BOT annuity basis. SITE OF THE PROJECT: The Govt‚ of India is contemplating to enhance the Traffic capacity and safety for efficient transportation of goods and services on the heavily trafficked National highway sections. The project under consideration
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as the number of periods involved and the applied interest rate. For this reason‚ the concept of the time value of money can be calculated by several financial applications. The financial applications consist of future values and present values‚ annuity‚ and yield of an investment‚ which will be discussed. When considering the above example of setting aside funds for college‚ the parent may need to be aware of various future and present values of money. 50 years from now “tuition at an average
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project is: Vproject=-1500000+-1120001.158+60001.1582+1510001.1583+3140001.1584+4950001.1585+48125001.1585=$1‚228‚485 2. If the firm raises $750‚000 of debt to fund the project and keeps the level of debt constant in perpetuity‚ we can consider the interest tax shields as a perpetuity. annual interest tax shield=750000*6.8%*40%=$20‚400 In this case‚ we assume the risk of the interest tax shield equals the risk of the debt. rTS=rD=6.8% PVTax Shield=204006.8%=$300‚000 APV=1228485+300000=$1‚528
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TIME VALUE OF MONEY I. DEFINITIONS * A peso received today is worth more than a peso received in the future * In economics‚ it is the opportunity cost of passing up the earning potential of a peso today. * The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. * Holds that‚ provided money can earn interest‚ any amount of money is worth more the sooner it is received. II. KEY CONCEPTS
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possession is worth more than that same amount of money promised in the future (Garrison‚ 2006). Today money can be invested to earn interest and therefore will be worth more in the future (Brealey‚ Myers‚ & Marcus‚ 2004). This paper will explain how annuities affect time value of money (TVM) and investment outcomes. In addition‚ this paper will briefly address the impact of discount and interest rates‚ present value‚ future value‚ opportunity cost and the impact interest has on money being borrowed.
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the firm save money today by investing in shorter-lived projects (such as less durable machinery)? ⇒ This is a job for Equivalent Annual Annuities 2. Investment timing and replacement decisions: ⇒ Should you invest in a new computer system today or invest in a new computer system next year? ⇒ When should existing machinery be replaced? Equivalent Annual Annuities Example: • You own a hotel in Bend. The location is killer but the place is run down. • Remodeling will cost you $100‚000 but generate
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Directions for Submitting Your Instructor Graded Assignment You must show your work on all problems. You may type your answer right into this document. Total points for project: 45 points. Projects must be submitted as a Microsoft Word document and uploaded to the Dropbox for Unit 7. All Projects are due by Tuesday at 11:59 PM ET of the assigned Unit. NOTE: Project problems should not be posted to the Discussion threads. Questions on the project problems should be addressed to the instructor
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