1. Basic present value calculations
Calculate the present value of the following cash flows, rounding to the nearest dollar:
a. A single cash inflow of $12,000 in five years, discounted at a 12% rate of return.
b. An annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of return.
c. A single receipt of $15,000 at the end of Year 1 followed by a single receipt of $10,000 at the end of Year 3. The company has a 10% rate of return.
d. An annual receipt of $8,000 for three years followed by a single receipt of $10,000 at the end of Year 4. The company has a 16% rate of return.
2. Cash flow calculations and net present value
On January 2, 20X1, Bruce Greene invested $10,000 in the stock market and purchased
…show more content…
The following information is available:
Cost of boat $500,000
Service life 10 summer seasons
Disposal value at the end of 10 seasons $100,000
Capacity per trip 300 passengers
Fixed operating costs per season (including straight-line depreciation) $160,000
Variable operating costs per trip $1,000
Ticket price $5 per passenger
All operating costs, except depreciation, require cash outlays. On the basis of similar operations in other parts of the country, management anticipates that each trip will be sold out and that 120,000 passengers will be carried each season. Ignore income taxes.
Instructions:
By using the net-present-value method, determine whether STL Entertainment should acquire the boat. Assume a 14% desired return on all investments- round calculations to the nearest dollar.
5. Equipment replacement decision
Columbia Enterprises is studying the replacement of some equipment that originally cost $74,000. The equipment is expected to provide six more years of service if $8,700 of major repairs are performed in two years. Annual cash operating costs total $27,200. Columbia can sell the equipment now for $36,000; the estimated residual value in six years is $5,000.
New equipment is available that will reduce annual cash operating costs to $21,000. The equipment costs $103,000, has a service life of six years, and has an estimated
1.4.2 “Solutions R Us” Technical Consultants have provided a quote of $105,000. The system will last for 10 years. Their quote includes technical support. The quote includes all the required hardware, however, the hardware must be checked and serviced by them, twice a year at a cost of $500 per
Given that the total profit over 8 years is $1.2375B (or $155M per year for 8 years), we will now compute the Present Value of this amount using the following formula:
30) Calculate the IRR for the following investment project: initial investment is $75,000; inflows are $20,000 for the next five years; required rate of return is 15%. (Round your answer to the nearest whole percentage)
of, say, $40 at time 1. If the good economy state is also realized in year 2, P.V.’s
g. The $15,000 long-term note is an 8%, 5-year, interest-bearing note with interest payable annually on December 31. The note was signed with First National Bank on December 31, 2011.
A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:
It should be noted that an income approach could have also been used. Using a determined market discount rate of 6% and current year revenue of $3,028,000 at a four year discounted rate, the value would have been $12,040,548. Because adequate market information was available to make a more accurate estimate of the fair value, this is the estimate that was chosen.
Peter’s Peripherals assembles multimedia upgrade kits --- sets of components for adding sound and video to desktop computers. The demand for their kits for the next four quarters is estimated in the table below. Unit manufacturing cost for each kit is $160. Holding costs on each kit is $80 per quarter. Any kit that must be delivered late is assessed a backorder cost of $120. Each worker is capable of finishing 10 kits per quarter. If the company chooses to vary work force levels, it will incur costs of $400 for each additional worker; $600 for each termination. The company currently has 28 employees.
As opposed to purchasing new equipment, we could opt to maintain the equipment we currently have, which has an estimated service life of 11 years remaining. We could retain all of our claimed Investment Tax Credit for this purchase, which has two years of depreciation left, and would not be required to invest in any new training for our employees. We would recognize $31,000 in depreciation in present value terms, as well as save an estimated $200,000 in training costs and losses due to lower production during the “learning curve”. I estimate these savings to be approximately one month of payroll to include both the time spent on training, and our reduced production as employees learn how to use the new equipment. Additional detail of this option is provided in Appendix B, C, & D.
You seem to recall that Dynamic’s Finance organization recommends either a 10% or a 15% discount rate for all Cost Savings Projects. You are fairly sure it is 10%.
ML had developed a policy of selling manual machines and renting automatic machines. Manual machines did not cost much, did not require service, and could be modified to attach different fasteners inexpensively. Automatic machines were rented on an annual basis because they would have been more expensive to sell and it provided annual income to ML. However, about 700 of the rented machines were returned each year. During the time that machines were in inventory, ML would modify the machines to attach different fasteners. This was expensive with an average cost per modification of $2000. If all 700 machines were modified during a given year this would have cost $1.4 million per year. It was also industry practice to provide preventative maintenance and
Rainbow Products is considering the purchase of a paint-mixing machine to reduce labor costs.The savings are expected to result in additional cash flows to Rainbow of $5,000 per year. Themachine costs $35,000 and is expected to last for 15 years. Rainbow has determined that the cost ofcapital for such an investment is 12%.[A] Compute the payback, net present value (NPV), and internal rate of return (IRR) for this machine.Should Rainbow purchase it? Assume that all cash flows (except the initial purchase) occur at the endof the year, and do not consider taxes. Rainbow Products is considering the purchase of a paint-mixing machine to reduce labor costs.The savings are expected to result in additional cash flows to Rainbow of $5,000 per
From year 2 to 5, an average EBIT of 2 times is achieved, however, EBIT is 5 times at first year.