15-1
Referencing the readings for the week, define the concepts of present value,
payback method, internal rate of return, or net present value and elaborate on
your interpretation of their value as assessment tools for an accountant or
operator (include an example) in a 2-3 paragraphs. (Readings are ProQuest
article: Munter, P. (2001, July). Using Cash Flow Information and Present
Value in Accounting Measurements. The Journal of Corporate Accounting
and Finance, and Edmonds, T., Olds, P., McNair, F., & Tsay, B. (2010).
Survey of Accounting (2nd ed.). Boston: McGraw-Hill Irwin.
16-1. (This problem is completed and should be ignored.)
a. inflow
b. Outflow
c. outflow
d. Inflow
e. outflow
f. outflow
g. inflow
16-2.
Kade Gulliver turned 20 years old today. His grandfather established a trust fund that will
pay Mr. Gulliver $60,000 on hi next birthday. However, Mr. Gulliver needs money today
to start his college education. His father is willing to help and has agreed to give Mr.
Gulliver the preset value of the future cash inflow, assuming a 10 percent rate of return.
a. Use a preset value table to determine the amount of cash that Mr. Gullivers father
should give him.
b. Use an algebraic formula to prove that the preset value of the trust fund (the
amount of cash computed in problem a) is equal to its $60,000 future value.
16-3. Quintana Pena expects to receive a $500,000 cash benefit when she retires five
years from today. Ms. Penas employer has offered an early retirement inventive by
agreeing to pay her $300,000 today if she agrees to retire immediately. Ms. Pena desires
to earn a rate of return of 12 percent.
a. Assuming that the retirement benefit is the only consideration in making the
retirement decision, should Ms. Pena accept her employers offer?
b. Identify the factors that cause the present value of the retirement benefit to be less
than $500,000.
16-5. Lake Shuttle Inc. is considering investing in two new vans that are expected to
generate combined cash inflows of $20,000 per year. The vans combined purchase price
is $65,000. The expected life and salvage value of each are four years and $15,000,
respectively. Lake Shuttle has an average cost of 14 percent.
a. Calculate the net present value of the investment opportunity
Indicate whether the investment opportunity is expected to earn a return that is above or
below the cost of capital and whether it should be accepted