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Exercise 13-12 (10 minutes)
Note: All present value factors in the computation below have been taken
from Exhibit 13B-1 in Appendix 13B, using a 12% discount rate.
Amount of the investment ............................
$104,950
Less present value of Year 1 and Year 2
cash inflows:
Year 1: $30,000 × 0.893 ...........................
$26,790
Year 2: $40,000 × 0.797 ...........................
31,880
58,670
Present value of Year 3 cash inflow ...............
$ 46,280
Therefore, the expected cash inflow for Year 3 is:
$46,280 ÷ 0.712 = $65,000.
Exercise 13-14 (10 minutes)
Project X:
Now
1
2
3
4
5
6
Initial investment ..............
$(35,000)
Annual cash inflows ..........
________
$12,000
$12,000
$12,000
$12,000
$12,000
$12,000
Total cash flows (a) ..........
$(35,000)
$12,000
$12,000
$12,000
$12,000
$12,000
$12,000
Discount factor (18%) (b) .
1.000
0.847
0.718
0.609
0.516
0.437
0.370
Present value (a)×(b) .......
$(35,000)
$10,164
$8,616
$7,308
$6,192
$5,244
$4,440
Net present value .............
$6,964
Exercise 13-15 (continued)
3.
Investment required
Factor of the internal=
rate of return Annual net cash inflow
$137,280
= = 3.695 (rounded)
$37,150
Looking in Exhibit 13B-2 and scanning along the 5-period line, a factor
of 3.695 falls closest to the factor for 11%. Thus, to the nearest whole
percent, the internal rate of return is 11%.
Problem 13-16 (20 minutes)
Now
1
2
3
4
Purchase of equipment ..........
$(275,000)
Working capital investment ...
(100,000)
Annual net cash receipts .......
$120,000
$120,000
$120,000
$120,000
Road construction .................
(40,000)
Working capital released .......
100,000
Salvage value of equipment ...
__________
________
_______
_______
65,000
Total cash flows (a) ..............
$(375,000)
$120,000
$120,000
$80,000
$285,000
Discount factor (20%) (b) .....
1.000
0.833
0.694
0.579
0.482
Present value (a)×(b) ...........
$(375,000)
$99,960
$83,280
$46,320
$137,370
Net present value .................
$(8,070)
Problem 13-17 (20 minutes)
1. The net present value is computed as follows:
Now
1
2
3
4
5
Purchase of
equipment ................
$(3,500,000)
Sales ........................
$3,400,000
$3,400,000
$3,400,000
$3,400,000
$3,400,000
Variable expenses .....
(1,600,000)
(1,600,000)
(1,600,000)
(1,600,000)
(1,600,000)
Out-of-pocket costs ...
__________
(700,000)
(700,000)
(700,000)
(700,000)
(700,000)
Total cash flows (a) ..
$(3,500,000)
$1,100,000
$1,100,000
$1,100,000
$1,100,000
$1,100,000
Discount factor (b) ....
1.000
0.862
0.743
0.641
0.552
0.476
Present value
(a)×(b) ....................
$(3,500,000)
$948,200
$817,300
$705,100
$607,200
$523,600
Net present value .....
$101,400
Problem 13-18 (20 minutes)
The net present value is computed as follows:
Now
1
2
3
4
Purchase of equipment ..........
$(130,000)
Working capital investment ...
(60,000)
Sales ....................................
$250,000
$250,000
$250,000
$250,000
Variable expenses .................
(120,000)
(120,000)
(120,000)
(120,000)
Fixed out-of-pocket costs ......
(70,000)
(70,000)
(70,000)
(70,000)
Overhaul of equipment ..........
(8,000)
Working capital released .......
60,000
Salvage value of equipment ...
__________
________
_______
_______
12,000
Total cash flows (a) ..............
$(190,000)
$60,000
$52,000
$60,000
$132,000
Discount factor (15%) (b) .....
1.000
0.870
0.756
0.658
0.572
Present value (a)×(b) ...........
$(190,000)
$52,200
$39,312
$39,480
$75,504
Net present value .................
$16,496
