PART I
A
1)
Where;
PV is the present value
FV is the Future value which is 15,000
R is the Interest rate which is 7%
N is the number of years which is 1
PV = 15,000/(1+0.07)1 = 14,018.69
2)
PV = FV/ (1+r)n
Where;
PV is the present value
FV is the Future value which is 15,000
R is the Interest rate which is 4%
N is the number of years which is 1
PV = 15,000/ (1+0.04)1 = 14,423.08
B.
Account A
PV = FV/ (1+r)n
Where;
PV is the present value
FV is the Future value which is 6,500
R is the Interest rate which is 6%
N is the number of years which is 2
PV = 6,500/ (1+0.06)2 = 5,784.98
Account B
PV = FV/ (1+r)n
Where;
PV is the present value
FV is the Future value which is 12,600
R is the Interest rate which is 6%
N is the number of years which is 2
PV = 12,600/ (1+0.06)2= 11,213.96
C
Year
Cash flow
PVIF@7%
Present value
Total present value
Cash flow
PVIF@5%
Present value
Total present value
Cash flow
PVIF@3%
Present value
Total present value
The present value is lower than the future value when the cash flows are discounted. The higher the discount factor the lower the present value. This is because discount factor considers the cost of capital and the opportunity cost of investing the sum of money today in alternative investment projects. Therefore, the higher the discount factor, the higher the cost of capital and opportunity cost.
PART II
Year
Cash flows
PVIF@0%
Present value
Total present value
Less initial outlay
Net present value
Cash flows
PVIF@2%
Present value
Total present value
Less initial outlay
Net present value
Cash flows
PVIF@6%
Present value
Total present value
Less initial outlay
Net present value
Cash flows
PVIF@11%
Present value
Total present value
Less initial outlay
Net present value
The discount rate at which the graph intersects the horizontal axis is 48%
B
Year
Cash flows
PVIF@1%
Present value
Total present value
Less initial outlay
Net present value
Cash flows
PVIF@4%
Present value
Total present value
Less initial outlay
Net present value
Year
Cash flows
PVIF@10%
Present value
Total present value
Less initial outlay
Net present value
Cash flows
PVIF@18%
Present value
Total present value
Less initial outlay
Net present value
The discount rate at which the graph intersects the horizontal axis is 2.5%
C.
Present value = Profitability index*Initial investment
Present value = 0.94* 4,200,000 = 3,948,000
