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BEC - Business Environment & Concepts (Forum Locked Forum Locked)
 CPAnet Forum : BEC - Business Environment & Concepts
Subject Topic: Becker Question - Chapter 3 (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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livelife
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Posted: 12 May 2010 at 09:32 | IP Logged  

I am getting confused as to when to use PV of an annuity of 1 @ XX% for XX years VS when to use PV of 1 due in XX years at XX%.

Para Co. is reviewing the following data relating to an energy saving investment proposal:

Cost - $50000

Residual Value at the end of 5 years - $10000

PV of an annuity of 1 at 12% for 5 years - 3.60

PV of 1 due in 5 years at 12% - 0.57

What would be the annual savings needed to make the investment realize 12% yield?

Correct Ans: $12,306. Other answeer choices $8189, $11111 and $13889.

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cutypie
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Posted: 12 May 2010 at 10:34 | IP Logged  

livelife

whats the cashflow- there is no info about cash flows.

if the annual cash flows are same amount -use  PV of annuity

if cash flows are different amt -use PV of $1

In this case for residual value use PV of $1

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cpa0123
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Posted: 12 May 2010 at 10:44 | IP Logged  

livelife,

PV of annuity is used for periodical cash flows, wherein the cash flow occurs regularly for several periods.
PV of $1 due is used only for one-time cash flow.

In the question given, PV of residual value is $10000*0.57=$5,700. Residual value is discounted at the end of the term. Therefore, the net investment equals $44,300 (50000-5700). Question asks for the annual savings needed to make this investment, so there is no NPV to be assumed. In order to realize $44,300 over a period of next 5 years, PV of annual cash savings would be $12,306 (44300/3.6)
3.6 is the sum of discounting factors for 5 years @ 12% (0.89+0.80+0.71+0.64+0.57)

Hope this helps!


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livelife
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Posted: 12 May 2010 at 15:43 | IP Logged  

Hi cutypie - Thats the entire question, there are no additional info regarding cash flow.
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livelife
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Posted: 12 May 2010 at 15:44 | IP Logged  

Hi cpa0123 - Thanks a lot for your explanation. Now I understand it a lot better than I did before.

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