This is not the correct ranking. To calculate the effects of the changes noted in each of the scenarios on the NPV: Scenario R: The amount of difference this change will make in the NPV is the amount of change in the cash inflow multiplied by the PV of an annuity factor for 12% for 5 years. Scenario S: The amount of difference this change will make in the NPV is the difference between the PV of an annuity factor for 12% for 5 years and the PV of an annuity factor for 18% for 5 years, multiplied by the annual cash inflow. Scenario T: The amount of difference this change will make in the NPV is the difference between the present value of the annual cash flow discounted at 12% for 5 years and the present value of the annual cash flow discounted at 12% for 4 years. So it is the difference between the PV of an annuity factor for 12% for 5 years and the PV of an annuity factor for 12% for 4 years, multiplied by the annual cash flow.
This is not the correct ranking. To calculate the effects of the changes noted in each of the scenarios on the NPV: Scenario R: The amount of difference this change will make in the NPV is the amount of change in the cash inflow multiplied by the PV of an annuity factor for 12% for 5 years. Scenario S: The amount of difference this change will make in the NPV is the difference between the PV of an annuity factor for 12% for 5 years and the PV of an annuity factor for 18% for 5 years, multiplied by the annual cash inflow. Scenario T: The amount of difference this change will make in the NPV is the difference between the present value of the annual cash flow discounted at 12% for 5 years and the present value of the annual cash flow discounted at 12% for 4 years. So it is the difference between the PV of an annuity factor for 12% for 5 years and the PV of an annuity factor for 12% for 4 years, multiplied by the annual cash flow.
The effects of the changes noted in each of the scenarios on the NPV are as follows: Scenario R: Annual cash inflows are reduced by 10%. The amount of difference this change will make in the NPV is the amount of change in the cash inflow multiplied by 3.605, which is the PV of an annuity factor for 12% for 5 years. ($800,000 × .1) × 3.605 = a $288,400 reduction in the NPV . Scenario S: The discount rate is increased from 12% to 18%. 3.605 is the PV of an annuity factor for 12% for 5 years, and 3.127 is the PV of an annuity factor for 18% for 5 years. The amount of difference this change will make in the NPV is $800,000 × (3.605 ? 3.127) = a $382,400 reduction in the NPV . Scenario T: The cash inflow in year 5 is reduced to zero, effectively converting the annuity from a 5-year annuity of $800,000 to a 4-year annuity of $800,000. The PV of an annuity factor for 12% for 5 years is 3.605, and the PV of an annuity factor for 12% for 4 years is 3.037. Therefore, the amount of difference this change will make in the NPV is $800,000 × (3.605 ? 3.037) = a $454,400 reduction in the NPV. The ranking of the three individual scenarios in the order of their effect on NPV from the least effect to the greatest effect is R, S, T.
This is not the correct ranking. To calculate the effects of the changes noted in each of the scenarios on the NPV: Scenario R: The amount of difference this change will make in the NPV is the amount of change in the cash inflow multiplied by the PV of an annuity factor for 12% for 5 years. Scenario S: The amount of difference this change will make in the NPV is the difference between the PV of an annuity factor for 12% for 5 years and the PV of an annuity factor for 18% for 5 years, multiplied by the annual cash inflow. Scenario T: The amount of difference this change will make in the NPV is the difference between the present value of the annual cash flow discounted at 12% for 5 years and the present value of the annual cash flow discounted at 12% for 4 years. So it is the difference between the PV of an annuity factor for 12% for 5 years and the PV of an annuity factor for 12% for 4 years, multiplied by the annual cash flow.
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