Chapter 26: Q18RQ (page 1464)
Explain the difference between the present value factor tables—Present Value of \(1 and Present Value of Ordinary Annuity of \)1.
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What is the accounting rate of return?
Use the Present Value of \(1 table (Appendix A, Table A-1) to determine the present value of \)1 received one year from now. Assume a 8% interest rate. Use the same table to find the present value of \(1 received two years from now. Continue this process for a total of five years. Round to three decimal places.
Requirements
1. What is the total present value of the cash flows received over the five-year period?
2. Could you characterize this stream of cash flows as an annuity? Why or why not?
3. Use the Present Value of Ordinary Annuity of \)1 table (Appendix A, Table A-2) to determine the present value of the same stream of cash flows. Compare your results to your answer to Requirement 1.
4. Explain your findings.
Calculate the present value of the following future cash flows, rounding all calculations to the nearest dollar.
11. \(5,000 received in three years with interest of 10%
12. \)5,000 received in each of the following three years with interest of 10%
13. Payments of \(2,000, \)3,000, and $4,000 received in years 1, 2, and 3, respectively, with interest of 7%
Question: What is an annuity? How does it differ from a lump sum payment?
List some common cash inflows from capital investments.
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