ACC206 Week-5

| July 29, 2018

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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