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Part Two
Design
Table 8.5 Present value of A1 to be paid in future
Years 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%
1 A0.970 A0.962 A0.952 A0.943 A0.935 A0.926 A0.918 A0.909
2 A0.942 A0.925 A0.907 A0.890 A0.873 A0.857 A0.842 A0.827
3 A0.915 A0.889 A0.864 A0.840 A0.816 A0.794 A0.772 A0.751
4 A0.888 A0.855 A0.823 A0.792 A0.763 A0.735 A0.708 A0.683
5 A0.862 A0.822 A0.784 A0.747 A0.713 A0.681 A0.650 A0.621
6 A0.837 A0.790 A0.746 A0.705 A0.666 A0.630 A0.596 A0.565
7 A0.813 A0.760 A0.711 A0.665 A0.623 A0.584 A0.547 A0.513
8 A0.789 A0.731 A0.677 A0.627 A0.582 A0.540 A0.502 A0.467
9 A0.766 A0.703 A0.645 A0.592 A0.544 A0.500 A0.460 A0.424
10 A0.744 A0.676 A0.614 A0.558 A0.508 A0.463 A0.422 A0.386
11 A0.722 A0.650 A0.585 A0.527 A0.475 A0.429 A0.388 A0.351
12 A0.701 A0.626 A0.557 A0.497 A0.444 A0.397 A0.356 A0.319
13 A0.681 A0.601 A0.530 A0.469 A0.415 A0.368 A0.326 A0.290
14 A0.661 A0.578 A0.505 A0.442 A0.388 A0.341 A0.299 A0.263
15 A0.642 A0.555 A0.481 A0.417 A0.362 A0.315 A0.275 A0.239
16 A0.623 A0.534 A0.458 A0.394 A0.339 A0.292 A0.252 A0.218
17 A0.605 A0.513 A0.436 A0.371 A0.317 A0.270 A0.231 A0.198
18 A0.587 A0.494 A0.416 A0.350 A0.296 A0.250 A0.212 A0.180
19 A0.570 A0.475 A0.396 A0.331 A0.277 A0.232 A0.195 A0.164
20 A0.554 A0.456 A0.377 A0.312 A0.258 A0.215 A0.179 A0.149
Worked example
A health-care clinic is considering purchasing a new analysis system. The net cash flows
from the new analysis system are as follows.
Year 1: −a10,000 (outflow of cash)
Year 2: a3,000
Year 3: a3,500
Year 4: a3,500
Year 5: a3,000
Assuming that the real discount rate for the clinic is 9%, using the net present value table
(Table 8.6), demonstrate whether the new system would at least cover its costs. Table 8.6
shows the calculations. It shows that, because the net present value of the cash flow is
positive, purchasing the new system would cover its costs, and will be (just) profitable
for the clinic.
Table 8.6 Present value calculations for the clinic
Year Cash flow Table factor Present value
1 (A10,000) × 1.000 = (A10,000.00)
2 A 3,000 × 0.917 = A2,752.29
3 A 3,500 × 0.842 = A2,945.88
4 A 3,500 × 0.772 = A2,702.64
5 A 3,000 × 0.708 = A2,125.28
Net present value = A526.09