40. Amitron Inc. is considering an engineering project that requires an investment of

$250,000 and is expected to generate the following stream of payments (income)

in the future. Use the TIMEVAL program to determine if the project is a good idea in a present value sense. That is, does the present value of expected cash inflows exceed the value of the investment that has to be made today?

Year Payment 1 $63,000 2 69,500 3 32,700 4 79,750 5 62,400 6 38,250

a. Answer the question if the relevant interest rate for taking present values is 9%, 10%, 11%, and 12%. In the program, notice that period zero represents a cash flow made at the present time, which isn’t discounted. The program will do the entire calculation for you if you input the initial investment as a negative number in this cell.

b. Use trial and error in the program to find the interest rate (to the nearest hundredth of a percent) at which Amitron would be just indifferent to the project.
This problem is a preview of an important method of evaluating projects known as capital budgeting. We’ll study the topic in detail in Chapters 10, 11, and 12. In part a of this problem, we find the net present value (NPV) of the project’s cash flows at various interest rates and reason intuitively that the project is a good idea if that figure is positive. In part

b, we find the return inherent in the project itself, which is called the internal rate of return (IRR). We’ll learn how to use that in Chapter 10.