Chapter Eight Problems
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.
Chapter 8 Exercise 1:
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.
b. An annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of return.
c. A single receipt of $15,000 at the end of Year 1 followed by a single receipt of $10,000 at the endof Year 3. The company has a 10% rate of return.
d. An annual receipt of $8,000 for three years followed by a single receipt of $10,000 at the end ofYear 4. The company has a 16% rate of return.
Chapter 8 Exercise 4:
4. Cash flow calculations and net present value
On January 2, 19X1, Bruce Greene invested $10,000 in the stock market and purchased 500 shares ofHeartland Development, Inc. Heartland paid cash dividends of $2.60 per share in 19X1 and 19X2; thedividend was raised to $3.10 per share in 19X3. On December 31, 19X3, Greene sold his holdings andgenerated proceeds of $13,000. Greene uses the net-present- value method and desires a 16% return oninvestments.
a. Prepare a chronological list of the investment’s cash flows. Note: Greene is entitled to the 19X3dividend.
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.
Chapter 8 exercise 5:
5. Straightforward net 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 hasbeen 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 BathTownship with other municipalities, estimates that the new location will save $40,000 in annualoperating costs.
a. Should the landfill be acquired if Bedford desires an 8% return on its investment? Use the netpresent-value method to determine your answer.
b. Compute the internal rate of return on this project.
Chapter 8 Problem 1:
1. Straightforward net-present-value and payback computations
STL Entertainment is considering the acquisition of a sight-seeing boat for summer tours along theMississippi River. The following information is available:
Cost of boat
Disposal value at the end of 10 seasons
Capacity per trip
Fixed operating costs per season (including straight-linedepreciation)
Variable operating costs per trip
10 summer seasons
$5 per passenger
All operating costs, except depreciation, require cash outlays. On the basis of similar operations in otherparts of the country, management anticipates that each trip will be sold out and that 120,000 passengerswill be carried each season. Ignore income taxes.
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.
Chapter 8 Problem 4:
4. Equipment replacement decision
Columbia Enterprises is studying the replacement of some equipment that originally cost $74,000. Theequipment is expected to provide six more years of service if $8,700 of major repairs are performed intwo 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 equipmentcosts $103,000, has a service life of six years, and has an estimated residual value of $13,000. Companysales will total $430,000 per year with either the existing or the new equipment. Columbia has aminimum desired return of 12% and depreciates all equipment by the straight-line method.
a. By using the net-present-value method, determine whether Columbia should keep its presentequipment or acquire the new equipment. Round all calculations to the nearest dollar, and ignoreincome taxes.
. Columbia’s management feels that the time value of money should be considered in all long-termdecisions. Briefly discuss the rationale that underlies management’s belief.