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Chapter 26: Q18RQ (page 1464)

Explain the difference between the present value factor tables鈥擯resent Value of \(1 and Present Value of Ordinary Annuity of \)1.

Short Answer

Expert verified

PV=FV1(1+r)n

Step by step solution

01

Meaning of Present Value

A money-related calculation gauge of the worth of a future amount of cashor stream of installments in today's dollars adjusted for interest and inflation is known as present value. In other words, it compares the acquiring control of a future dollar to that of a current dollar.

02

Difference between the present value factor tables-Present Value of $1 and Present Value of Ordinary Annuity of $1

The Present Value of $1 tableis used to calculate the value today of one future amount (a lump sum). The Present Value of an Annuity of $1 is used to calculate the value today of a series of equal future amounts (an annuity).

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Most popular questions from this chapter

What is the decision rule for payback?

Question: Defining capital investments and the capital budgeting process

Match each capital budgeting method with its definition.

Methods

1. Accounting rate of return

2. Internal rate of return

3. Net present value

4. Payback

Definitions

  1. Is only concerned with the time it takes to get cash outflows returned.
  2. Considers operating income but not the time value of money in its analyses.
  3. Compares the present value of cash outflows to the present value of cash inflows to determine investment worthiness.
  4. The true rate of return an investment earns.

Outlining the capital budgeting process Review the following activities of the capital budgeting process: a. Budget capital investments. b. Project investments鈥� cash flows. c. Perform post-audits. d. Make investments. e. Use feedback to reassess investments already made. f. Identify potential capital investments. g. Screen/analyze investments using one or more of the methods discussed. Place the activities in sequential order as they occur in the capital budgeting process.

Why are net present value and internal rate of return considered discounted cash flow methods?

Using the time value of money Helen wants to take the next four years off work to travel around the world. She estimates her annual cash needs at $31,000 (if she needs more, she will work odd jobs). Helen believes she can invest her savings at 10% until she depletes her funds. Requirements

  1. How much money does Helen need now to fund her travels?
  2. After speaking with a number of banks, Helen learns she will only be able to invest her funds at 6%. How much does she need now to fund her travels?
See all solutions

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