With compound interest, the interest is added to principal in the calculation of interest in future periods This addition of interest to the principal is called compounding This differs from simple interest, in which interest is computed based upon only the principal The frequency with which interest is compounded per year will dictate how many interest computations are required (i e annually is once, semi annually is twice, and quarterly is four times) Imagine that Ross Co , fearing that you wouldn't take its deal, decides instead to offer you compound interest on the same $10,000 note How much will Ross pay you at the end of three years if interest is compounded annually at a rate of 5 If required, round your answers to the nearest cent Principal Annual amount of Accumulated amount at amount at begging interest (Principal at end of year (principal at beginning of year of the year beginning of year x 5 ) annual amount of interest) Year 1 $10,000 $500 $10,500 2 $10,500 $525 $11,025 3 $11,025 $ $ McCall Corporation is looking to invest in Project A or Project B The data surrounding each project is provided below McCall's cost of capital is 11 Project A This project requires an initial investment of $172,500 The project will have a life of 6 years Annual revenues associated with the project will be $130,000 and expenses associated with the project will be $35,000 Project B This project requires an initial investment of $172,500 The project will have a life of 6 years Annual revenues associated with the project will be $130,000 and expenses associated with the project will be $35,000 This project requires an initial investment of $130,000 The project will have a life of 4 years Annual revenues associated with the project will be $111,000 and expenses associated with the project will be $60,000 Calculate the net present value and the present value index for each project using the present value tables provided below Present Value of $1 (a single sum) at Compound Interest Present Value of an Annuity of $1 at Compound Interest Note Use a minus sign to indicate a negative NPV If an amount is zero, enter 0 Enter the present value index to 2 decimals Project A Project B Total present value of net cash flow $ $ Amount to be invested 172,500 130,000 Net present value $ $

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With compound interest, the interest is added to principal in the calculation of interest in future periods. This addition of interest to the principal is

With compound interest, the interest is added to principal in the calculation of interest in future periods. This addition of interest to the principal is called compounding. This differs from simple interest, in which interest is computed based upon only the principal. The frequency with which interest is compounded per year will dictate how many interest computations are required (i.e. annually is once, semi-annually is twice, and quarterly is four times).

Imagine that Ross Co., fearing that you wouldn't take its deal, decides instead to offer you compound interest on the same $10,000 note. How much will Ross pay you at the end of three years if interest is compounded annually at a rate of 5%? If required, round your answers to the nearest cent.

Principal Annual amount of Accumulated amount at

amount at begging interest (Principal at end of year (principal at beginning of year +

of the year beginning of year x 5%) annual amount of interest)

Year

1 $10,000 $500 $10,500

2 $10,500 $525 $11,025

3 $11,025 $_______ $___________

McCall Corporation is looking to invest in Project A or Project B. The data surrounding each project is provided below. McCall's cost of capital is 11%

Project A

Project B

This project requires an initial investment of $172,500. The project will have a life of 6 years. Annual revenues associated with the project will be $130,000andexpenses associated with the project will be $35,000.This project requires an initial investment of $130,000. The project will have a life of 4 years. Annual revenues associated with the project will be $111,000andexpenses associated with the project will be $60,000.

Calculate thenet present valueand thepresent value indexfor each project using the present value tables provided below.

Present Value of $1 (a single sum) at Compound Interest.

Present Value of an Annuity of $1 at Compound Interest.

Note:Use a minus sign to indicate a negative NPV.If an amount is zero, enter "0".Enter the present value index to 2 decimals.

Project A Project B

Total present value of net cash flow $___________ $___________

Amount to be invested 172,500 130,000

Net present value $____________ $____________