Please complete the following 5 exercises below in either Excel or a
word document (but must be single document). You must show your work where
appropriate (leaving the calculations within Excel cells is acceptable). Save
the document, and submit it in the appropriate week using the Assignment
Submission button.
1. Basic
present value calculations
Calculate the present value of the following
cash flows, rounding to the nearest dollar:
a. A
single cash inflow of $12,000 in five years, discounted at a 12% rate of
return.
12,000/(1.12)^5= $6,809
b. An
annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of
return.
16000[(1.14^12-1)/0.14(1.14)^12] = $90,565
c. A
single receipt of $15,000 at the end of Year 1 followed by a single receipt of
$10,000 at the end of Year 3. The company has a 10% rate of return.
15000/1.1 + 10000/1.1^3 = $211,500
d. An annual receipt of $8,000
for three years followed by a single receipt of $10,000 at the end of Year 4.
The company has a 16% rate of return.
8000[(1.16^3-1)/0.16(1.16)^3]
+ 10000/1.16^4 = $23,490
2. Cash flow calculationsand net present value
On January 2, 20X1, Bruce Greene invested $10,000 in
the stock market and purchased 500 shares of Heartland Development, Inc.
Heartland paid cash dividends of $2.60 per share in 20X1 and 20X2; the dividend
was raised to $3.10 per share in 20X3. On December 31, 20X3, Greene sold his
holdings and generated proceeds of $13,000. Greene uses the net-present- value
method and desires a 16% return on investments.
a. Prepare
a chronological list of the investment's cash flows. Note: Greene is
entitled to the 20X3 dividend.
Dec 31, 20X1: $1,300Dec 31, 20X2: $1,300
Dec 31, 20X3: $1,550
Dec 31, 20X3: $13,000
b. Compute
the investment's net present value, rounding calculations to the nearest
dollar.
c. Given
the results of part (b), should Greene have acquired the Heartland stock?
Briefly explain.
3. Straightforwardnet present value and internal rate of return
The City of Bedford is studying a 600-acre site
on Route 356 for a new landfill. The startup cost has been calculated as
follows:
Purchase cost: $450 per acre
Site preparation: $175,000
The site can be used for 20 years before it
reaches capacity. Bedford, which shares a facility in Bath Township with other
municipalities, estimates that the new location will save $40,000 in annual
operating costs.
a. Should
the landfill be acquired if Bedford desires an 8% return on its investment? Use
the net-present-value method to determine your answer.
4. Straightforward
net-present-value and payback computations
STL Entertainment is considering the acquisition of a
sight-seeing boat for summer tours along the Mississippi River. The following
information is available:
Cost of boat
$500,000
Service life
10 summer seasons
Disposal value at the end of 10 seasons
$100,000
Capacity per trip
300 passengers
Fixed operating costs per season (including
straight-line depreciation)
$160,000
Variable operating costs per trip
$1,000
Ticket price
$5 per passenger
All operating costs, except depreciation, require
cash outlays. On the basis of similar operations in other parts of the country,
management anticipates that each trip will be sold out and that 120,000
passengers will be carried each season. Ignore income taxes.
Instructions:
By using the net-present-value method, determine
whether STL Entertainment should acquire the boat. Assume a 14% desired return
on all investments- round calculations to the nearest dollar.
5. Equipment
replacement decision
Columbia Enterprises is studying the replacement of
some equipment that originally cost $74,000. The equipment is expected to
provide six more years of service if $8,700 of major repairs are performed in
two years. Annual cash operating costs total $27,200. Columbia can sell the
equipment now for $36,000; the estimated residual value in six years is $5,000.
New equipment is available that will reduce annual
cash operating costs to $21,000. The equipment costs $103,000, has a service
life of six years, and has an estimated residual value of $13,000. Company
sales will total $430,000 per year with either the existing or the new
equipment. Columbia has a minimum desired return of 12% and depreciates all
equipment by the straight-line method.
Instructions:
a. By
using the net-present-value method, determine whether Columbia should keep its
present equipment or acquire the new equipment. Round all calculations to the
nearest dollar, and ignore income taxes.
b. Columbia's
management feels that the time value of money should be considered in all
long-term decisions. Briefly discuss the rationale that underlies management's
belief.
c.