Question 8

TIME VALUE OF MONEY You have an opportunity to invest in a business venture. For just $50,000 invested on January 1st, you will receive $20,000 in after-tax cash flows per year on December 31st for 3 years. As you know, if all you cared about was a Nominal Payback Period of "less than 3 years" for your investments, then this would be a good investment since $50,000 / $20,000 = 2.50 years. However, your financial advisor has told you to consider the "Time Value of Money" whenever looking at a potential investment. Your advisor suggests that you use Present Value factors at 10%. Yr 1 = 0.909, Yr 2 = 0.826, and Yr 3 = 0.751 Using these factors, what is the Present Value of your annual cash payments (the sum of the annual benefits)?

$49,720

$31,540

$34,700

$60,000

Question 9

You have an opportunity to invest in a business venture. For just $50,000 invested on January 1st, you will receive $20,000 in After-Tax Cash Flows per year on December 31st for 3 years. As you know, if all you cared about was a Nominal Payback Period of "less than 3 years" for your investments, then this would be a good investment since $50,000 / $20,000 = 2.50 years. However, your financial advisor has told you to consider the "Time Value of Money" whenever looking at a potential investment. Your advisor suggests that you use Present Value factors at 10%. Yr 1 = 0.909, Yr 2 = 0.826, and Yr 3 = 0.751 Using these factors, what is the Net Present Value of this investment opportunity?

Net Present Value $10,000

Net Present Value <$280>

Net Present Value $99,720

Net Present Value $110,000

Question 10

TIME VALUE OF MONEY You have an opportunity to invest in a business venture. It requires a $250,000 investment on January 1st. You will receive $70,000 in After-Tax Cash Flows per year on December 31st for 3 years. At the end of 3 years, the project will be terminated, and all assets liquidated. The net terminal value is $80,000. Although the sum of all these cash receipts is $290,000, you realize that the Time Value of Money concept means that those future cash receipts are worth less in "today" dollars. Therefore, for all investment opportunities, you use 10% to analyze the current (i.e., present) value of all future cash flows. The Present Value factors at 10% are Yr 1 = 0.909, Yr 2 = 0.826, and Yr 3 = 0.751 Using those factors, what is the Net Present Value of this investment opportunity?

Net Present Value $484,100

Net Present Value $254,020

Net Present Value <$15,900>

Net Present Value $4,020