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Fundamentals of Business Economics

CHAPTER 7 – DISCOUNTING AND INVESTMENT APPRAISAL

7.1 C

Responses (A) and (B) are concerned with the absolute value of income
streams and not discounting those streams. Response (C) is correct since
discounting is done because future income is worth less now even in the
absence of inflation. Response (D) does not relate to discounting.

7.2 B

1000 × 1.03 × 1.035 × 1.032 = 1100.16.

7.3 A

NPV = (6,500 × Annuity factor) − 25,000

= (6,500 × 4.486) − 25,000

= 4,159

7.4 C

Investment = PV = $8,000 × 1/0.05 = $160,000

7.5 IRR = 8.2%

H = 10%, N H = $(25,000)

L = 5%, N L = $45,000

45,000
IRR = 5 + × (10 – 5) = 8.2%
45,000 – (–25,000)

7.6 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

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