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Present Value and Investment

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?

Solution Summary

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