Financial Accounting - Top Reward Thanks Question Details AE9-7 Calculate Presen

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Financial Accounting - Top Reward Thanks

Question Details

AE9-7

Calculate Present Value [LO 2]

Juanita Martinez is ready to retire and has a choice of three pension plans. Plan A provides for an immediate cash payment of $125,000. Plan B provides for the payment of $12,500 per year for 10 years and the payment of $125,000 at the end of year 10. Plan C will pay $23,000 per year for 10 years. Juanita Martinez desires a return of 12 percent.


Determine the present value of each plan. (Round present value factor calculations to 4 decimal places, e.g. 0.2525. Round all other calculations and final answer to 0 decimal places, e.g. 5,250.)

Present Value
Plan A $ ____________

Plan B $ ____________

Plan C $ ____________



AE9-9

Calculate the Internal Rate of Return [LO 3]

An investment that costs $169,430 will reduce operating costs by $29,000 per year for 13 years.


Determine the internal rate of return of the investment (ignore taxes). (Round present value factor calculations to 4 decimal places, e.g. 2.2512 and the final answer to 0 decimal places, e.g. 25%.)

Internal rate of return %

Should the investment be undertaken if the required rate of return is 17 percent?

No or Yes



AE9-11

Depreciation Tax Shield [LO 4]

Strauss Corporation is making a $70,000 investment in equipment with a 5-year life. The company uses the straight-line method of depreciation and has a tax rate of 40 percent. The company’s required rate of return is 11 percent.

What is the present value of the tax savings related to depreciation of the equipment?

(Round the present value factor calculations to 4 decimal places, e.g. 0.2525. Round all other calculations and the final answer to 2 decimal places, e.g. 25.21.)

Present Value $ ______________

Explanation / Answer

1

125000

125000

125000

1

0.8772

29000

25438.5965

2

0.7695

29000

22314.5583

3

0.6750

29000

19574.1740

4

0.5921

29000

17170.3280

5

0.5194

29000

15061.6913

6

0.4556

29000

13212.0099

7

0.3996

29000

11589.4824

8

0.3506

29000

10166.2126

9

0.3075

29000

8917.7303

10

0.2697

29000

7822.5705

11

0.2366

29000

6861.9039

12

0.2076

29000

6019.2140

13

0.1821

29000

5280.0123

169430

$169,430

0

1

0.8547

29000

24786.3248

2

0.7305

29000

21184.8930

3

0.6244

29000

18106.7461

4

0.5337

29000

15475.8514

5

0.4561

29000

13227.2234

6

0.3898

29000

11305.3192

7

0.3332

29000

9662.6659

8

0.2848

29000

8258.6888

9

0.2434

29000

7058.7084

10

0.2080

29000

6033.0841

11

0.1778

29000

5156.4821

12

0.1520

29000

4407.2497

13

0.1299

29000

3766.8801

148430.1171

$169,430

21000

Plan - A Plan - B Plan - C Years Discount rate 12% Cash Receipts Discounted cash Cash Receipts Discounted cash Cash Receipts Discounted cash 0

1

125000

125000

0 0 0 0 1 0.8929 12500 11160.7143 23000 20535.7143 2 0.7972 12500 9964.9235 23000 18335.4592 3 0.7118 12500 8897.2531 23000 16370.9457 4 0.6355 12500 7943.9760 23000 14616.9158 5 0.5674 12500 7092.8357 23000 13050.8177 6 0.5066 12500 6332.8890 23000 11652.5158 7 0.4523 12500 5654.3652 23000 10404.0320 8 0.4039 12500 5048.5403 23000 9289.3142 9 0.3606 12500 4507.6253 23000 8294.0306 10 0.3220 137500 44271.3200 23000 7405.3844 Present value of cash flow's

125000

110874 129955 Plan - A $125,000 Plan - B $110,874 Plan - C $129,955

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