Appendix 8A
The Concept of Present Value
Exercise 8A-1 (10 minutes)
a. From Exhibit 8B–1, the present value factor for 8% for three periods is
0.794. Therefore, the present value of the investment in the garage is
Exercise 8A-2 (10 minutes)
You should prefer option (a) because its present value is the largest:
Exercise 8A-3 (10 minutes)
a. From Exhibit 8B–1, the factor for 6% for 3 periods is 0.840. Therefore,
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Solutions Manual, Appendix 8C 409
Exercise 8C-1 (20 minutes)
Items and Computations
Year(s)
(1)
Amount
(2)
Tax
Effect
(1) × (2)
After–Tax
Cash
Flows
10%
Factor
Present
Value of
Cash
Flows
Project A:
Investment in photocopier ………….
Now
$(50,000)
—
$(50,000)
1.000
$(50,000)
Annual net cash inflows ……………..
1-8
$9,000
1 – 0.30
$6,300
5.335
33,611
Depreciation deductions* ……………
1-8
$6,250
0.30
$1,875
5.335
10,003
Salvage value of the photocopier ……
8
$5,000
1 – 0.30
$3,500
0.467
1,635
Net present value ……………………..
$( 4,751)
Project B:
Investment in working capital ……..
Now
$(50,000)
—
$(50,000)
1.000
$(50,000)
Annual net cash inflows ……………..
1-8
$9,000
1 – 0.30
$6,300
5.335
33,611
Release of working capital ………….
8
$50,000
—
$50,000
0.467
23,350
Net present value ……………………..
$ 6,961
* $50,000 ÷ 8 years = $6,250 per year
