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