E. Additional Exercises
- Suppose Tonia is comparing two different investments, each of which is projected to continue to provide profi ts for the
foreseeable future. Option A will pay $38,750 in the fi rst year, and then grow at a 4% annual rate. Option B will pay
$52,535 in the fi rst year but grow at a 2.5% annual rate. On the basis of her required rate of return, she determines that
both options offer the same present value. What is her required rate of return? - Compare to Exercise 14. Mohan is considering investing in a business that he projects would earn him profi t of $35,000
in the fi rst year. He requires an 11% rate of return. Using perpetuities, calculate the present value of these profi ts,
assuming they are growing at a rate of:
a. 11%
b. 15%
c. Do these values agree with common sense?14.2 The Payback Period Method
The present value techniques described in Section 14.1 are powerful and widely used
methods for evaluating business opportunities. Nonetheless, they come with some seri-
ous disadvantages. The present value is highly dependent on what we choose to use as aBefore making any
investment, we want to
consider the payback!
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572 Chapter 14 Evaluating Projected Cash Flows