Learning Materials
Features
Discover
Chapter 4: Q13BP (page 282)
Question: Mrs. Crawford will receive $7,600 a year for the next 19 years from her trust. If a 14 percent interest rate is applied, what is the current value of the future payments?
The current value is $49,782.80.
Over 30 million students worldwide already upgrade their learning with 91影视!
All the tools & learning materials you need for study success - in one app.
Get started for free
How does the modified internal rate of return include concepts from both the traditional internal rate of return and the net present value methods? (LO12-4)
Question: As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due). To find the present value of an annuity due, the annuity formula must be adjusted as to the following: PVAD 5 A 3 ( 12 1 ________ (11i) n 21 ___________ i 11) The Capital Budgeting Process blo7716x_ch09_255-294.indd 284. Likewise, the formula for the future value of an annuity due requires a modification: FVAD 5 A 3 ( (11i) n11 21 ___________ i 21). What is the future value of a 15-year annuity of $1,800 per period where payments come at the beginning of each period? The interest rate is 12 percent.
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows:
Project E (\(20,000 Investment) | |
Year | Cash flows |
1 | \)5,000 |
2 | 6,000 |
3 | 7,000 |
4 | 10,000 |
Project H (\(20,000 Investment) | |
Year | Cash flows |
1 | \)16,000 |
2 | 5,000 |
3 | 4,000 |
Determine the net present value of the projects based on a zero percent discount rate.
Determine the net present value of the projects based on a 9 percent discount rate.
The internal rate of return on Project E is 13.25 percent, and the internal rate of return on Project H is 16.30 percent. Graph a net present value profile for the two investments similar to Figure12-3. (Use a scale up to \(8,000 on the vertical axis, with \)2,000 increments. Use a scale up to 20 percent on the horizontal axis, with 5 percent increments.)
If the two projects are not mutually exclusive, what would your acceptance or rejection decision be if the cost of capital (discount rate) is 8 percent? (Use the net present value profile for your decision; no actual numbers are necessary.)
If the two projects are mutually exclusive (the selection of one precludes the selection of the other), what would be your decision if the cost of capital is (1) 6 percent, (2) 13 percent, (3) 18 percent? Once again, use the net present value profile for your answer.
Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 12 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 16 percent. Either method will require an initial capital outlay of \(75,000. The inflows from projected business over the next five years are shown next. Which method should be selected using net present value analysis?
Year Method 1 Method 2
1 .................................... \)18,000 $20,000
2 .................................... 24,000 25,000
3 .................................... 34,000 35,000
4 .................................... 26,000 28,000
5 .................................... 14,000 15,00
Jack Hammer invests in a stock that will pay dividends of \(2.00 at the end of the first year; \)2.20 at the end of the second year; and \(2.40 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the stock for \)33. What is the present value of all future benefits if a discount rate of 11 percent is applied? (Round all values to two places to the right of the decimal point.)
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Flashcards 
91影视 AI 
Notes 
Study Plans 
Study Sets 
Find a degree 
Magazine