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DB Week 7, Schultz

# DB Week 7, Schultz - BUS5431 Managerial Accounting Week 7...

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04/20/2011 BUS5431 Managerial Accounting Week 7 Homework Chapter 9 Problem 1 The original contract was worth \$15,814,400 in present value terms while the new offer is worth \$14,858,490. When the time value of money is taken into account, it is obvious that the new offer is not much better than the old one. Cash PV Time Flow Factor Total 0 \$5,000,000 1.0000 \$5,000,000 1 3,000,000 0.8929 909,100 2 3,000,000 0.7972 826,400 3 3,000,000 0.7118 751,300 4 3,000,000 0.6355 683,000 5 3,000,000 0.5674 620,900 \$15,814,400 Cash PV Time Flow Factor Total 1 3,000,000 0.8929 909,100 2 3,100,000 0.7972 909,040 3 3,200,000 0.7118 901,560 4 3,300,000 0.6355 887,900 5 3,400,000 0.5674 869,260 5 (Balloon) 6,000,000 0.5674 2,438,600 \$14,858,490 Problem 3 Present value of Machine A Cash PV Flow Factor Total Savings 20,000 4.3553 87,106.00 Cost (70,000) 1.0000 (70,000 .00) NPV \$18,496 .00 Present value of Machine B Cash PV Flow Factor Total Savings 25,000 4.3553 108,882.50

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Cost (95,000) 1.0000 (95,000 .00) NPV \$13,882 .50 c. Both NPVs are greater than zero, so both are acceptable investments. However, the company should purchase machine A since it has the highest NPV. Problem 4
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DB Week 7, Schultz - BUS5431 Managerial Accounting Week 7...

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