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Problem 8-31 (45 minutes)
1. A net present value computation for each investment follows:
Item
Year(s)
Amount of
Cash Flows
20%
Factor
Present
Value of
Cash Flows
Common stock:
Purchase of the stock ........
Now
$(80,000)
1.000
$(80,000)
Sale of the stock ...............
4
$180,000
0.482
86,760
Net present value ..............
$ 6,760
Preferred stock:
Purchase of the stock ........
Now
$(30,000)
1.000
$(30,000)
Annual cash dividend
(6%)..............................
1-4
$1,800
2.589
4,660
Sale of the stock ...............
4
$24,000
0.482
11,568
Net present value ..............
$(13,772)
Bonds:
Purchase of the bonds .......
Now
$(50,000)
1.000
$(50,000)
Semiannual interest
received .........................
1-8*
$3,000
5.335**
16,005
Sale of the bonds ..............
8*
$58,500
0.467**
27,320
Net present value ..............
$ (6,675)
*
8 semiannual interest periods.
**
Factor for 8 periods at 10%.
