Annual cash inflows that will arise from two competing investment projects are given below: Year Investment A Investment B 1 $ 5
,000 $8,000 2 6,000 7,000 3 7,000 6,000 4 8,000 5,000 Total $26,000 $26,000 The discount rate is 9%. Use Excel or a financial calculator to solve the homework. Round answers to the nearest dollar. Required: Compute the present value of the cash inflows for each investment. Each investment opportunity will require the same initial investment
1 answer:
Explanation:
Since the cash flows are given in the question for the Investment A and the Investment B
So, the present value could be find out by multiplying the each year cash inflows with its discounted factor i.e 9%
So that the present value could come
The discount factor should be computed by
= 1 ÷ (1 + rate) ^ years
The attachment is shown below:
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Answer: Degree of Operating Leverage
A Tech = 2.75
Z Tech = 3
Explanation:
As defined in question itself,
Degree of Operating Leverage =
As here, it is provided that profit for both the companies are same amounting $4 million.
Although the fixed cost differ by $1 million.
A Tech Degree of operating Leverage = 1 + = 2.75
Z Tech Degree of Operating Leverage = 1 + = 3
This clearly demonstrates that A Tech will reach its break even faster than the Z Tech as the ratio of fixed cost to variable cost is lower in A tech in comparison to Z Tech.