Page 264 - BA2 Integrated Workbook - Student 2017

Fundamentals of Management Accounting

14.3 C

The 10 payments will be made from years 0 through to year 9.

From the cumulative present value table, the 9 year, 8% annuity factor is 6.247.
This gives us years 1 through to 9.

As the first payment is due now, we have to add in the discount factor for year
0, which is 1.

So the factor = (1 + 6.247) = 7.247

Present value = $1,000 × 7.247 = $7,247

14.4 The NPV is $35,710.

The discount factor for 8.5% is not given in the present value tables, so the
formula must be used to calculate the discount factor:

1
Year 1: discount factor = (1+0.085) = 0.9217

2
Year 2: discount factor = (1+0.085) = 0.8495
3
Year 3: discount factor = (1+0.085) = 0.7829
4
Year 4: discount factor = (1+0.085) = 0.7216

Year Cash flow Discount factor Present value
($000) ($000)
0 (350) 1 (350.00)
1 100 0.9217 92.17

2 150 0.8495 127.43

3 120 0.7829 93.95
4 100 0.7216 72.16
NPV = 35.71

256