2 Determining the present value of a lump-sum future cash receipt LO 16-1 Adam W
ID: 2420295 • Letter: 2
Question
2 Determining the present value of a lump-sum future cash receipt LO 16-1
Adam Wilton turned 20 years old today. His grandfather had established a trust fund that will pay him $82,000 on his next birthday. However, Adam needs money today to start his college education, and his father is willing to help. Mr. Wilton has agreed to give Adam the present value of the $82,000 future cash inflow, assuming a 8 percent rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Determine the amount of cash that Adam Wilton's father should give him. (Round your final answer to the nearest whole dollar amount.) CASH ( )
3 Determining the present value of an annuity LO 16-1
The dean of the School of Fine Arts is trying to decide whether to purchase a copy machine to place in the lobby of the building. The machine would add to student convenience, but the dean feels compelled to earn an 8 percent return on the investment of funds. Estimates of cash inflows from copy machines that have been placed in other university buildings indicate that the copy machine would probably produce incremental cash inflows of approximately $15,000 per year. The machine is expected to have a three-year useful life with a zero salvage value. (Use appropriate factor(s) from the tables provided.)
Use Present Value PV of $1 to determine the maximum amount of cash the dean should be willing to pay for a copy machine. (Round intermediate calculations and final answer to 2 decimal places.)
MAXIMUM AMOUNT ( )
Use Present Value PVA of $1 to determine the maximum amount of cash the dean should be willing to pay for a copy machine.(Round your final answer to 2 decimal places.) MAXIMUM AMOUNT ( )
4 Determining net present value LO 16-2
Callaghan Company is considering investing in two new vans that are expected to generate combined cash inflows of $33,000 per year. The vans’ combined purchase price is $99,500. The expected life and salvage value of each are six years and $21,100, respectively. Callaghan has an average cost of capital of 14 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.)
NET PRESENT VALUE ( )
Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital. ABOVE ( ) OR BELOW ( )
Based on your answer in Requirement b-1, should the investment opportunity be accepted.
ACCEPTED ( ) OR REJECTED ( )
7 Determining the internal rate of return LO 16-3
Merton Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company’s cash outflow for operating expenses by $1,290,000 per year. The cost of the equipment is $6,408,255.60. Merton expects it to have a 8-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Calculate the internal rate of return of the investment opportunity. INTEREST RATE OF RETURN ( )
Indicate whether the investment opportunity should be accepted. ACCEPTED OR REJECTED
9 Computing the payback period and unadjusted rate of return for same investment opportunity LO 16-4
Norman Rentals can purchase a van that costs $132,000; it has an expected useful life of four years and no salvage value. Norman uses straight-line depreciation. Expected revenue is $54,780 per year. Assume that depreciation is the only expense associated with this investment.
PAYBACK PERIOD ( ) YEARS
Determine the unadjusted rate of return based on the average cost of the investment. (Round your answer to 1 decimal place. (i.e., .234 should be entered as 23.4).)
UNADJUSTED RATE OF RETURN ( ) %
8 Determining the payback period LO 16-4
Bailey Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $13,800,000; it will enable the company to increase its annual cash inflow by $6,000,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $29,700,000; it will enable the company to increase annual cash flow by $9,900,000 per year. This plane has an eight-year useful life and a zero salvage value.
Determine the payback period for each investment alternative. (Round your answers to 1 decimal place.)
PAYBACK PERIOD
ALTERNATIVE 1 ( ) YEARS
ALTERNATIVE 2 ( ) YEARS
Identify the alternative Bailey should accept if the decision is based on the payback approach. ALTERNATIVE 1 OR ALTERNATIVE 2
6 Determining the cash flow annuity with income tax considerations LO 16-2
To open a new store, Linton Tire Company plans to invest $342,000 in equipment expected to have a six year useful life and no salvage value. Linton expects the new store to generate annual cash revenues of $323,000 and to incur annual cash operating expenses of $187,000. Linton’s average income tax rate is 30 percent. The company uses straight-line depreciation.
Determine the expected annual net cash inflow / outflow for each of the first four years after Linton opens the new store. (Negative amounts should be indicated by a minus sign.)
NET CASH INFLOW/OUTFLOW
YEAR 1 (_________) (________________)
YEAR 2 (__________) ( ______________)
YEAR 3 (__________) (_____________)
YEAR 4 (__________) (____________)
Adam Wilton turned 20 years old today. His grandfather had established a trust fund that will pay him $82,000 on his next birthday. However, Adam needs money today to start his college education, and his father is willing to help. Mr. Wilton has agreed to give Adam the present value of the $82,000 future cash inflow, assuming a 8 percent rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
a.Determine the amount of cash that Adam Wilton's father should give him. (Round your final answer to the nearest whole dollar amount.) CASH ( )
3 Determining the present value of an annuity LO 16-1
The dean of the School of Fine Arts is trying to decide whether to purchase a copy machine to place in the lobby of the building. The machine would add to student convenience, but the dean feels compelled to earn an 8 percent return on the investment of funds. Estimates of cash inflows from copy machines that have been placed in other university buildings indicate that the copy machine would probably produce incremental cash inflows of approximately $15,000 per year. The machine is expected to have a three-year useful life with a zero salvage value. (Use appropriate factor(s) from the tables provided.)
a.Use Present Value PV of $1 to determine the maximum amount of cash the dean should be willing to pay for a copy machine. (Round intermediate calculations and final answer to 2 decimal places.)
MAXIMUM AMOUNT ( )
b.Use Present Value PVA of $1 to determine the maximum amount of cash the dean should be willing to pay for a copy machine.(Round your final answer to 2 decimal places.) MAXIMUM AMOUNT ( )
4 Determining net present value LO 16-2
Callaghan Company is considering investing in two new vans that are expected to generate combined cash inflows of $33,000 per year. The vans’ combined purchase price is $99,500. The expected life and salvage value of each are six years and $21,100, respectively. Callaghan has an average cost of capital of 14 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
a.Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.)
NET PRESENT VALUE ( )
b-1.Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital. ABOVE ( ) OR BELOW ( )
b-2.Based on your answer in Requirement b-1, should the investment opportunity be accepted.
ACCEPTED ( ) OR REJECTED ( )
7 Determining the internal rate of return LO 16-3
Merton Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company’s cash outflow for operating expenses by $1,290,000 per year. The cost of the equipment is $6,408,255.60. Merton expects it to have a 8-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
a.Calculate the internal rate of return of the investment opportunity. INTEREST RATE OF RETURN ( )
b.Indicate whether the investment opportunity should be accepted. ACCEPTED OR REJECTED
9 Computing the payback period and unadjusted rate of return for same investment opportunity LO 16-4
Norman Rentals can purchase a van that costs $132,000; it has an expected useful life of four years and no salvage value. Norman uses straight-line depreciation. Expected revenue is $54,780 per year. Assume that depreciation is the only expense associated with this investment.
Required a. Determine the payback period. (Round your answer to 1 decimal place.)
PAYBACK PERIOD ( ) YEARS
Determine the unadjusted rate of return based on the average cost of the investment. (Round your answer to 1 decimal place. (i.e., .234 should be entered as 23.4).)
UNADJUSTED RATE OF RETURN ( ) %
8 Determining the payback period LO 16-4
Bailey Airline Company is considering expanding its territory. The company has the opportunity to purchase one of two different used airplanes. The first airplane is expected to cost $13,800,000; it will enable the company to increase its annual cash inflow by $6,000,000 per year. The plane is expected to have a useful life of five years and no salvage value. The second plane costs $29,700,000; it will enable the company to increase annual cash flow by $9,900,000 per year. This plane has an eight-year useful life and a zero salvage value.
a-1.Determine the payback period for each investment alternative. (Round your answers to 1 decimal place.)
PAYBACK PERIOD
ALTERNATIVE 1 ( ) YEARS
ALTERNATIVE 2 ( ) YEARS
.Identify the alternative Bailey should accept if the decision is based on the payback approach. ALTERNATIVE 1 OR ALTERNATIVE 2
6 Determining the cash flow annuity with income tax considerations LO 16-2
To open a new store, Linton Tire Company plans to invest $342,000 in equipment expected to have a six year useful life and no salvage value. Linton expects the new store to generate annual cash revenues of $323,000 and to incur annual cash operating expenses of $187,000. Linton’s average income tax rate is 30 percent. The company uses straight-line depreciation.
RequiredDetermine the expected annual net cash inflow / outflow for each of the first four years after Linton opens the new store. (Negative amounts should be indicated by a minus sign.)
NET CASH INFLOW/OUTFLOW
YEAR 1 (_________) (________________)
YEAR 2 (__________) ( ______________)
YEAR 3 (__________) (_____________)
YEAR 4 (__________) (____________)
Explanation / Answer
2 a) Present value of $82000 @8%pa.
=82000/1.08
=$75925.93
3 a)
maximum amount of cash the dean should be willing to pay for a copy machine $38655
b)maximum amount of cash the dean should be willing to pay for a copy machine $38655
4 a)
b 1)ABOVE
2)ACCEPTED
YEAR CASH FLOW($) DF @8% PRESENT VALUE 1 15000 0.926 13890 2 15000 0.857 12855 3 15000 0.794 11910 TOTAL 38655Related Questions
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