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.)
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. Gulliver’s 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. Pena’s 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 employer’s 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