Question

Figure 14-10.

Present value of $1

Periods	4%	6%	8%	10%	12%	14%
1	0.962	0.943	0.926	0.909	0.893	0.877
2	0.925	0.890	0.857	0.826	0.797	0.769
3	0.889	0.840	0.794	0.751	0.712	0.675
4	0.855	0.792	0.735	0.683	0.636	0.592
5	0.822	0.747	0.681	0.621	0.567	0.519
6	0.790	0.705	0.630	0.564	0.507	0.456
7	0.760	0.665	0.583	0.513	0.452	0.400
8	0.731	0.627	0.540	0.467	0.404	0.351
9	0.703	0.592	0.500	0.424	0.361	0.308
10	0.676	0.558	0.463	0.386	0.322	0.270

Present value of an Annuity of $1

Periods	4%	6%	8%	10%	12%	14%
1	0.962	0.943	0.926	0.909	0.893	0.877
2	1.886	1.833	1.783	1.736	1.690	1.647
3	2.775	2.673	2.577	2.487	2.402	2.322
4	3.630	3.465	3.312	3.170	3.037	2.914
5	4.452	4.212	3.993	3.791	3.605	3.433
6	5.242	4.917	4.623	4.355	4.111	3.889
7	6.002	5.582	5.206	4.868	4.564	4.288
8	6.733	6.210	5.747	5.335	4.968	4.639
9	7.435	6.802	6.247	5.759	5.328	4.946
10	8.111	7.360	6.710	6.145	5.650	5.216

Problem 14-12

Refer to Figure 14-10. Ray Corporation is looking to invest in a new piece of equipment. Two manufacturers of this type of equipment are being considered. After-tax inflows for the two competing projects are:

Year	Fallon Equipment Inc.		Toller Equipment Inc.
1	275,000		70,000
2	225,000		70,000
3	185,000		285,000
4	140,000		330,000
5	65,000		390,000

Both projects require an initial investment of $400,000. In both cases, assume that the equipment has a life of five years with no salvage value.

Required:

A. Assuming a discount rate of 8 percent, compute the net present value of each piece of equipment.

	Net Present Value
Fallon Equipment	$
Toller Equipment Inc.	$

B. A third option is now available for a supplier outside of the country. The cost is also $400,000, but it will produce even cash flows over its five-year life. What must the annual cash flow be for this equipment to be selected over the other two? Assume an 8 percent discount rate.
$

Answer 1

SOLUTION:

1) Fallon equipment

Year	Cash Flow	Discount factor	PV
0	-400,000	1	-400,000
1	275,000	0.926	254,650
2	225,000	0.857	192,825
3	185,000	0.794	146,890
4	140,000	0.735	102,900
5	65,000	0.681	44,265
			341,530

　

Toller Equipment Inc.

Year	Cash Flow	Discount factor	PV
0	-400,000	1	-400,000
1	70,000	0.926	64,820
2	70,000	0.857	59,990
3	285,000	0.794	226,290
4	330,000	0.735	242,550
5	390,000	0.681	265,590
			459,240

　

2)

CF*3.993 - $400,000 = $459,240

CF*3.993 = $859,240

CF = $215,187

Thus, in order to supply outside the country the cash should be higher than $215,187