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Present Value and Investment

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19. Monson Company is considering three investment opportunities with cash flows as described below:

Project A: Cash investment now $15,000
Cash inflow at the end of 5 years $21,000
Cash inflow at the end of 8 years $21,000

Project B: Cash investment now $11,000
Annual cash outflow for 5 years $ 3,000
Additional cash inflow at the end
of 5 years $21,000

Project C: Cash investment now $21,000
Annual cash inflow for 4 years $11,000
Cash outflow at the end of 3 years $ 5,000
Additional cash inflow at the end
of 4 years $15,000

Compute the net present value of each project assuming Monson Company uses a 12% discount rate.

20. Jim Bingham is considering starting a small catering business. He would need to purchase a delivery van and various equipment costing $125,000 to equip the business and another $60,000 for inventories and other working capital needs. Rent for the building used by the business will be $35,000 per year. Jim's marketing studies indicate that the annual cash inflow from the business will amount to $120,000. In addition to the building rent, annual cash outflow for operating costs will amount to $40,000. Jim wants to operate the catering business for only six years. He estimates that the equipment could be sold at that time for 4% of its original cost. Jim uses a 16% discount rate.

Would you advise Jim to make this investment?

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Solution Summary

Instructions on how to calculate present value and advice on whether someone should commit to an investment is given.