Question description

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.