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Chapter 4: Question: (page 281)
You invest \(3,000 for three years at 12 percent.Combine these steps using the formula FV 5 PV 3 (1 1 i) n to find the future value of \)3,000 in 3 years at 12 percent interest.
Answer
The value of investment after three years is $4,214.78.
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The Hudson Corporation makes an investment of \(24,000 that provides the following cash flow:
Year | Cash flow |
1 | \)13,000 |
2 | 13,000 |
3 | 4,000 |
a. What is the net present value at an 8 percent discount rate?
b. What is the internal rate of return?
c. In this problem, would you make the same decision under both parts a and b?
Your grandfather has offered you a choice of one of the three following alternatives: \(7,500 now; \)2,200 a year for nine years; or $31,000 at the end of nine years. Assuming you could earn 10 percent annually, which alternative should you choose? If you could earn 11 percent annually, would you still choose the same alternative?
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.)
Katie Pairy Fruits Inc. has a \(1,000 20-year bond outstanding with a nominal yield of 15 percent (coupon equals 15% x \)1,000 5 \(150 per year). Assume that the current market required interest rate on similar bonds is now only 12 percent.
a. Compute the current price of the bond.
b. Find the present value of 3 percent x \)1,000 (or \(30) for 20 years at 12 percent. The \)30 is assumed to be an annual payment. Add this valueto $1,000.
c. Explain why the answers in parts a and b are basically the same. (There is a slight difference due to rounding in the tables.)
The Woodruff Corporation purchased a piece of equipment three years ago for \(230,000. It has an asset depreciation range (ADR) midpoint of eight years. The old equipment can be sold for \)90,000.
A new piece of equipment can be purchased for \(320,000. It also has an ADR of eight years.
Assume the old and new equipment would provide the following operating gains (or losses) over the next six years:
Year New Equipment Old Equipment
1 .................... \)80,000 $25,000
2 .................... 76,000 16,000
3 .................... 70,000 9,000
4 .................... 60,000 8,000
5 .................... 50,000 6,000
6 .................... 45,000 (7,000)
The firm has a 36 percent tax rate and a 9 percent cost of capital. Should the new equipment be purchased to replace the old equipment?
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