# PV of cash flows

A consulting engineering firm is considering two models of SUVs for the company principals. A GM model will have a first cost of $26,000, an operating cost of $2000, and a salvage value of $12,000 after 3 years. A Ford model will have a first cost of $29,000, an operating cost of $1200, and a $15,000 resale value after 3 years. At an interest rate of 15% per year, which model should the consulting firm buy? Conduct an annua worth analysis.

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"A consulting engineering firm is considering two models of SUVs for the company principals. A GM model will have a first cost of $26,000, an operating cost of $2000, and a salvage value of $12,000 after 3 years. A Ford model will have a first cost of $29,000, an operating cost ...

#### Solution Summary

PV of cash flows is determined.

Time value of money problems

Time value of money exercises

1. What is the present value of the following series of cash flows discounted at 12 percent: $40,000 now; $50,000 at the end of the first year; $0 at the end of year the second year; $60,000 at the end of the third year; and $70,000 at the end of the fourth year?

2. Assume an income-producing property is priced at $5,000 and has the following income stream (year 1, $1,000; year 2, -$2,000; year 3, $3,000; and year 4, $3,000). Would an investor with a required rate of return of 15 percent be wise to invest at the current price?

3. Calculate the present value of the income stream given below assuming discount rates of 8 percent and 20 percent.

Year Income

1 $3,000

2 $4,000

3 $6,000

4 $1,000

4. Calculate the IRR and NPV for the following investment opportunities. Assume a 16 percent discount rate for the NPV calculations:

Year Project 1 Cash Flow Project 2 Cash Flow

0 -$10,000 -$10,000

1 1,000 1,000

2 2,000 12,000

3 12,000 1,800