Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 112

For the following questions, circle the best response.

Kafka, Inc., estimates that it can generate $4,600 per year in additional cash inflows for the next five years if it modernizes its equipment at a cost of $15,000. The company’s minimum desired rate of return is 10%. Using the present value factors in your text (Tables 6-4 and 6-5), the net present value of the project is (rounded)

a. $(12,562).

b. $(2,438).

c. $2,438.

d. $8,000.

e. $23,000.

Table 6-4 Factors for Calculating the Present Value of $1

No. of Periods	Discount Rate
	2%	4%	6%	8%	10%	12%	14%	16%	18%	20%
1	0.980	0.9615	0.9434	0.9259	0.9091	0.8929	0.8772	0.8621	0.8475	0.8333
2	0.961	0.9246	0.8900	0.8573	0.8264	0.7972	0.7695	0.7432	0.7182	0.6944
3	0.942	0.8890	0.8396	0.7938	0.7513	0.7118	0.6750	0.6407	0.6086	0.5787
4	0.924	0.8548	0.7921	0.7350	0.6830	0.6355	0.5921	0.5523	0.5158	0.4823
5	0.906	0.8219	0.7473	0.6806	0.6209	0.5674	0.5194	0.4761	0.4371	0.4019
6	0.888	0.7903	0.7050	0.6302	0.5645	0.5066	0.4556	0.4104	0.3704	0.3349
7	0.871	0.7599	0.6651	0.5835	0.5132	0.4523	0.3996	0.3538	0.3139	0.2791
8	0.853	0.7307	0.6274	0.5403	0.4665	0.4039	0.3506	0.3050	0.2660	0.2326
9	0.837	0.7026	0.5919	0.5002	0.4241	0.3606	0.3075	0.2630	0.2255	0.1938
10	0.820	0.6756	0.5584	0.4632	0.3855	0.3220	0.2697	0.2267	0.1911	0.1615
11	0.804	0.6496	0.5268	0.4289	0.3505	0.2875	0.2366	0.1954	0.1619	0.1346
12	0.788	0.6246	0.4970	0.3971	0.3186	0.2567	0.2076	0.1685	0.1372	0.1122
13	0.773	0.6006	0.4688	0.3677	0.2897	0.2292	0.1821	0.1452	0.1163	0.0935
14	0.758	0.5775	0.4423	0.3405	0.2633	0.2046	0.1597	0.1252	0.0985	0.0779
15	0.743	0.5553	0.4173	0.3152	0.2394	0.1827	0.1401	0.1079	0.0835	0.0649
16	0.728	0.5339	0.3936	0.2919	0.2176	0.1631	0.1229	0.0930	0.0708	0.0541
17	0.714	0.5134	0.3714	0.2703	0.1978	0.1456	0.1078	0.0802	0.0600	0.0451
18	0.700	0.4936	0.3503	0.2502	0.1799	0.1300	0.0946	0.0691	0.0508	0.0376
19	0.686	0.4746	0.3305	0.2317	0.1635	0.1161	0.0829	0.0596	0.0431	0.0313
20	0.673	0.4564	0.3118	0.2145	0.1486	0.1037	0.0728	0.0514	0.0365	0.0261
21	0.660	0.4388	0.2942	0.1987	0.1351	0.0926	0.0638	0.0443	0.0309	0.0217
22	0.647	0.4220	0.2775	0.1839	0.1228	0.0826	0.0560	0.0382	0.0262	0.0181
23	0.634	0.4057	0.2618	0.1703	0.1117	0.0738	0.0491	0.0329	0.0222	0.0151
24	0.622	0.3901	0.2470	0.1577	0.1015	0.0659	0.0431	0.0284	0.0188	0.0126
25	0.610	0.3751	0.2330	0.1460	0.0923	0.0588	0.0378	0.0245	0.0160	0.0105
30	0.552	0.3083	0.1741	0.0994	0.0573	0.0334	0.0196	0.0116	0.0070	0.0042
35	0.500	0.2534	0.1301	0.0676	0.0356	0.0189	0.0102	0.0055	0.0030	0.0017
40	0.453	0.2083	0.0972	0.0460	0.0221	0.0107	0.0053	0.0026	0.0013	0.0007
45	0.410	0.1712	0.0727	0.0313	0.0137	0.0061	0.0027	0.0013	0.0006	0.0003
50	0.372	0.1407	0.0543	0.0213	0.0085	0.0035	0.0014	0.0006	0.0003	0.0001

Table 6-5 Factors for Calculating the Present Value of an Annuity of $1

No. of Periods	Discount Rate
	2%	4%	6%	8%	10%	12%	14%	16%	18%	20%
1	0.980	0.9615	0.9434	0.9259	0.9091	0.8929	0.8772	0.8621	0.8475	0.8333
2	1.942	1.8861	1.8334	1.7833	1.7355	1.6901	1.6467	1.6052	1.5656	1.5278
3	2.884	2.7751	2.6730	2.5771	2.4869	2.4018	2.3216	2.2459	2.1743	2.1065
4	3.808	3.6299	3.4651	3.3121	3.1699	3.0373	2.9137	2.7982	2.6901	2.5887
5	4.713	4.4518	4.2124	3.9927	3.7938	3.6048	3.4331	3.2743	3.1272	2.9906
6	5.601	5.2421	4.9173	4.6229	4.3553	4.1114	3.8887	3.6847	3.4976	3.3255
7	6.472	6.0021	5.5824	5.2064	4.8684	4.5638	4.2883	4.0386	3.8115	3.6046
8	7.325	6.7327	6.2098	5.7466	5.3349	4.9676	4.6389	4.3436	4.0776	3.8372
9	8.162	7.4353	6.8017	6.2469	5.7590	5.3282	4.9464	4.6065	4.3030	4.0310
10	8.983	8.1109	7.3601	6.7101	6.1446	5.6502	5.2161	4.8332	4.4941	4.1925
11	9.787	8.7605	7.8869	7.1390	6.4951	5.9377	5.4527	5.0286	4.6560	4.3271
12	10.575	9.3851	8.3838	7.5361	6.8137	6.1944	5.6603	5.1971	4.7932	4.4392
13	11.348	9.9856	8.8527	7.9038	7.1034	6.4235	5.8424	5.3423	4.9095	4.5327
14	12.106	10.5631	9.2950	8.2442	7.3667	6.6282	6.0021	5.4675	5.0081	4.6106
15	12.849	11.1184	9.7122	8.5595	7.6061	6.8109	6.1422	5.5755	5.0916	4.6755
16	13.578	11.6523	10.1059	8.8514	7.8237	6.9740	6.2651	5.6685	5.1624	4.7296
17	14.292	12.1657	10.4773	9.1216	8.0216	7.1196	6.3729	5.7487	5.2223	4.7746
18	14.992	12.6593	10.8276	9.3719	8.2014	7.2497	6.4674	5.8178	5.2732	4.8122
19	15.678	13.1339	11.1581	9.6036	8.3649	7.3658	6.5504	5.8775	5.3162	4.8435
20	16.351	13.5903	11.4699	9.8181	8.5136	7.4694	6.6231	5.9288	5.3527	4.8696
21	17.011	14.0292	11.7641	10.0168	8.6487	7.5620	6.6870	5.9731	5.3837	4.8913
22	17.658	14.4511	12.0416	10.2007	8.7715	7.6446	6.7429	6.0113	5.4099	4.9094
23	18.292	14.8568	12.3034	10.3711	8.8832	7.7184	6.7921	6.0442	5.4321	4.9245
24	18.914	15.2470	12.5504	10.5288	8.9847	7.7843	6.8351	6.0726	5.4509	4.9371
25	19.523	15.6221	12.7834	10.6748	9.0770	7.8431	6.8729	6.0971	5.4669	4.9476
30	22.396	17.2920	13.7648	11.2578	9.4269	8.0552	7.0027	6.1772	5.5168	4.9789
35	24.999	18.6646	14.4982	11.6546	9.6442	8.1755	7.0700	6.2153	5.5386	4.9915
40	27.355	19.7928	15.0463	11.9246	9.7791	8.2438	7.1050	6.2335	5.5482	4.9966
45	29.490	20.7200	15.4558	12.1084	9.8628	8.2825	7.1232	6.2421	5.5523	4.9986
50	31.424	21.4822	15.7619	12.2335	9.9148	8.3045	7.1327	6.2463	5.5541	4.9995

Step 1 of 2

Calculate Present value:

Present value:

An ordinary annuity’s present value is the value in today's dollars of a equal cash flow series, where each cash flow in the series takes place at the completion of one period in future. It represents the current period amount of cash that will provide for a receipt or payment of a series of equal cash flows at regular intervals, including compound interest.