# ACC206 Week-5

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. 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 end of 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 of Year 4. The company has a 16% rate of

return.

2. Cash flow calculations and 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.

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. 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 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.

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