ACC206 Week Five 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
ACC206 Week Five 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.
1. Basic present value calculations
Calculate the present value of the following cash flows, rounding to the nearest dollar:
- A single cash inflow of $12,000 in five years, discounted at a 12% rate of return.
$12,000 X 0.567 = $6,804.00 present value.
- An annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of return.
$16,000 X 5.660 = $90,560 present value.
- 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.
Year 1 present value: 15,000 X .909 = 13,635
Year 3 present value: 10,000 X .751 = 7,510
Total present value: $21,145
- 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.
| Year | Receipt | Present value factor | Present value |
| Year 1 | 8,000 | .862 | 6,896 |
| Year 2 | 8,000 | .743 | 5,944 |
| Year 3 | 8,000 | .641 | 5,128 |
| Year 4 | 10,000 | .552 | 5,520 |
| Total Present value | $23,538 |
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.
- Prepare a chronological list of the investment’s cash flows. Note: Greene is entitled to the 20X3 dividend.
| Date | Description | Cash (outflow) inflow |
| 2-Jan-20X1 | Greene Purchased 500 shares | (10,000) |
| 20X1 | Heartland paid dividends @ 2.60 ps | 1,300 |
| 20X2 | Heartland paid dividends @ 2.60 ps | 1,300 |
| 20X3 | Heartland paid dividents @3.10 ps | 1,550 |
| 31-Dec-20X3 | Greene sold holdings | 13,000 |
- Compute the investment’s net present value, rounding calculations to the nearest dollar.
| Date | Description | Cash (outflow) inflow | Present value Factor @ 16% |
Present Value of net annual Cash Flow |
| 2-Jan-20X1 | Greene Purchased 500 shares | -10,000 | 1.000 | -10,000 |
| 20X1 | Heartland paid dividends @ 2.60 per share | 1,300 | 0.862 | 1,121 |
| 20X2 | Heartland paid dividends @ 2.60 per share | 1,300 | 0.743 | 966 |
| 20X3 | Heartland paid dividends @3.10 per share | 1,550 | 0.641 | 994 |
| 31-Dec-20X3 | Greene sold holdings | 13,000 | 0.641 | 8,333 |
| Net present value | $1,413 |
- Given the results of part (b), should Greene have acquired the Heartland stock? Briefly explain.
Yes, green should have acquired the stock, since the net present value of $1,413 is positive, this is a good investment.
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.
- Should the landfill be acquired if Bedford desires an 8% return on its investment? Use the net-present-value method to determine your answer.
Purchase Cost (270,000)
Site Preparation (175,000)
Total Outlay (445,000)
Savings per year 40,000
ROI 8%
Term years 20
Present value factor 9.818
Net present value of inflows 392,720
Net present value (52,280)
Since the net present value indicates a negative return, the landfill should not be acquired.
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.
Based on the below net-present-value method STL Entertainment should acquire the boat, as the present value is positive.
Fixed operating costs per season 160,000
Variable Operating Costs per year, assuming 400 trips (120,000/300) 4,000
total cash outlay per year 164,000
Ticket sales 120,000 @5.00 each 600,000
| Column1 | Cash outflow | Cash inflow | Net cash flow | Present value factor @ 14% | Present value of net annual cash flow |
| Initial cash outlay | $500,000 | (500,000) | 1.000 | (500,000) | |
| End of Year 1 | 164,000 | 600,000 | 436,000 | 0.877 | 382,372 |
| End of Year 2 | 164,000 | 600,000 | 436,000 | 0.769 | 335,284 |
| End of Year 3 | 164,000 | 600,000 | 436,000 | 0.675 | 294,300 |
| End of Year 4 | 164,000 | 600,000 | 436,000 | 0.592 | 258,112 |
| End of Year 5 | 164,000 | 600,000 | 436,000 | 0.519 | 226,284 |
| End of Year 6 | 164,000 | 600,000 | 436,000 | 0.456 | 198,816 |
| End of Year 7 | 164,000 | 600,000 | 436,000 | 0.400 | 174,400 |
| End of Year 8 | 164,000 | 600,000 | 436,000 | 0.351 | 153,036 |
| End of Year 9 | 164,000 | 600,000 | 436,000 | 0.308 | 134,288 |
| End of Year 10 | 164,000 | 600,000 | 436,000 | 0.270 | 117,720 |
| Disposable value | 100,000 | (100,000) | |||
| Net present value | $1,674,612 |
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:
- 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.
- 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.
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