All exercises except 9-17

# All exercises except 9-17 - EXERCISE 9-4 Using Present...

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EXERCISE 9-4. Using Present Value Tables [LO 1] what is the present value of \$600 per year for five years if the required return is 10 percent (answer using Table 2 in Appendix B) Answers Cash Present Value Flow Factor Total \$600 3.7908 \$2,274.48 EXERCISE 9-7. 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 \$200,000. Plan B provides for the payment of \$20,000 per year for 10 years and the payment of \$200,000 at the end of year 10. Plan C will pay \$35,000 per year for 10 years. Juanita Martinez desires a return of 8 percent. Determine the present value of each plan and select the best one. Answers Total PLAN A \$200,000 Plan B Cash Present Value Flow Factor Total \$ 20,000 6.7101 \$134,202 200,000 .4632 92,640 \$226,842

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Plan C Cash Present Value Flow Factor Total \$35,000 6.7101 \$234,853.50 From the above calculations, it can be interpreted that the Martinez should go for Plan C as this plan gives the highest net present value. EXERCISE 9-8. Calculate Net Present Value [LO 2] An investment that costs \$60,000 will return \$25,000 per year for five years. Determine the net present value of the investment if the required rate of return is 14 percent. (Ignore taxes.) Should the investment be undertaken? Answers Cash Present Value Flow Factor Total (\$60,000) 1.0000 (\$60,000.00) 25,000 3.4331 85,827.50 \$ 25,827.50 EXERCISE 9-9. Calculate the Internal Rate of Return [LO 3] An investment that costs \$100,000 will reduce operating costs by \$20,000 per year for 10 years. Determine the internal rate of return of the investment (ignore taxes).Should the investment be undertaken if the required rate of return is 18 percent?
Answers Initial outlay \$100,000 Annuity amount 20,000 Outlay ÷ annuity amount = PV of Annuity factor 5.00 Note that the IRR at PV annuity factor of 5 is 15%. Internal rate of return 15% From the above calculations it can be concluded that the investment should not be undertaken. This is because the present required rate of return is 18% and the IRR is also 15%. So the above investment is not desirable. EXERCISE 9-11. Depreciation Tax Shield [LO 4] Strauss Corporation is making a \$60,000 investment in equipment with a five-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 12 percent. Required

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All exercises except 9-17 - EXERCISE 9-4 Using Present...

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