Machinery costs $1 million today and $100,000 per year to operate. It lasts for 2 years....
Machinery costs $1 million today and $100,000 per year to operate. It lasts for 2 years. What is the equivalent annual annuity if the discount rate is 7%? Enter your answer in dollars and round to the cent. Remember that costs are negative cash flows; so, include the negative sign.
Find the profitability index of a project with the following
cash flows using a discount rate of 7%:
Period 0: -1000
Period 1: 766
Period 2: 363
Period 3: 269
Enter your answer in a decimal and round to the hundredths
place.
Homework Answers
1)
| Year | Cash Flow |
Discounting Factor [1/{1.07^year}] |
PV of Cash Flows [Cash Flow*Discounting Factor] |
| 0 | 1000000 | 1 | 1000000 |
| 1 | 100000 | 0.934579439 | 93457.94393 |
| 2 | 100000 | 0.873438728 | 87343.87283 |
| Sum of PVs = | 1180801.817 |
PV of Annuity = P*[1-{(1+i)^-n}]/i
1180801.817 = P*[1-{(1+0.07)^-2}]/0.07
82656.127 = P*[0.12656]
Equivalent Annual Annuity = P = 82656.127/0.12656 = $653098.3486
2)
| Year | Cash Flow |
Discounting Factor [1/(1.1062^year)] |
PV of Cash Flows (cash flows*discounting factor) |
| 0 | -1000 | 1 | -1000 |
| 1 | 766 | 0.903995661 | 692.4606762 |
| 2 | 363 | 0.817208155 | 296.6465602 |
| 3 | 269 | 0.738752626 | 198.7244564 |
| Sum of PVs of POSITIVE CASH FLOWS(other than Initial Investment) | 1187.831693 | ||
|
Profitability Index [Sum of POSITIVE cashflows/Initial Investment] |
1.187831693 |
Profitability Index = 1.19
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Machinery costs $1 million today and $100,000 per year to
operate. It lasts for 2 years....
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