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Solutions Manual, Appendix 13A 61
Appendix 13A
The Concept of Present Value
Exercise 13A-1 (10 minutes)
Amount of Cash Flows 18%
Present Value of Cash
Flows
Year
Investment
A
Investment
B Factor
Investment
A
Investment
B
1 $3,000 $12,000 0.847 $ 2,541 $10,164
2 $6,000 $9,000 0.718 4,308 6,462
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62 Managerial Accounting, 16th Edition
Exercise 13A-2 (10 minutes)
The present value of the first option is $150,000, since the entire amount
would be received immediately.
The present value of the second option is:
On the surface, the second option appears to be a better choice because it
promises a total cash inflow of $340,000 over the 20-year period ($14,000
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Solutions Manual, Appendix 13A 63
Exercise 13A-3 (10 minutes)
1. From Exhibit 13B-1, the factor for 10% for 3 periods is 0.751. Therefore,
the present value of the required investment is:
2. From Exhibit 13B-1, the factor for 14% for 3 periods is 0.675. Therefore,
the present value of the required investment is:
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64 Managerial Accounting, 16th Edition
Exercise 13A-4 (10 minutes)
1. From Exhibit 13B-1, the factor for 10% for 5 periods is 0.621. Therefore,
the company must invest:
2. From Exhibit 13B-1, the factor for 14% for 5 periods is 0.519. Therefore,
the company must invest:
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Solutions Manual, Appendix 13A 65
Exercise 13A-5 (10 minutes)
1. From Exhibit 13B-2, the factor for 16% for 8 periods is 4.344. The
computer system should be purchased only if its net present value is
2. From Exhibit 13B-2, the factor for 20% for 8 periods is 3.837. Therefore,
the maximum purchase price would be:
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66 Managerial Accounting, 16th Edition
Exercise 13A-6 (10 minutes)
1. From Exhibit 13B-2, the factor for 12% for 20 periods is 7.469. Thus,
the present value of Mr. Ormsby’s winnings is:
2. Whether or not it is correct to say that Mr. Ormsby is the state’s newest
millionaire depends on your point of view. He will receive more than a
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Solutions Manual, Appendix 13C 67
Appendix 13C
Income Taxes and Net Present Value
Analysis
Exercise 13C-1 (10 minutes)
The project’s net present value is computed as follows:
Now Years
1-5
Purchase of equipment ……………………. $(2,000,000)
Sales …………………………………………… $2,800,000
Variable expenses ………………………….. (1,600,000)