16-1, 16-2, 16-3, 16-5 Exercise 16-1Identifying cash inflows and outflows Indicate which of the following items will result in cash inflows and which will result in cash outflows. The first one is shown as an example. Initial investment |Outflow | |Salvage values |Inflow | |Recovery of working capital |Inflow | |Incremental expenses |Outflow | |Working capital commitments |Outflow | |Costsavings |Inflow | |Incremental revenue |Inflow |
Exercise 16-2Determining the present value of a lump-sum future cash receipt Stan Sweeney turned 20 years old today. His grandfather established a trust fund that will pay Mr. Sweeney $80,000 on his next birthday. However, Stan needs money today to start his college education. His father is willing to help and has agreed to give Stan the present value of the future cash inflow, assuming a 10 percent rate of return. Required A. Use a present value table to determine the amount of cash that Stan Sweeney’s father should give him.
Using the Present Value of $1 table, The factor for 1 year at 10% rate of return is 0. 90909 The PV of $80,000 after year 1 is PV = 80,000 * PV factor PV = 80000 * 0. 90909 PV = $72,727. 20 Based of The Present Value, Stan Sweeney’s father should give him $72,727. 20 B. ) Use an algebraic formula to prove that the present value of the trust fund (the amount of cash computed in Requirement a) is equal to its $80,000 future value. Investment + (0. 90909 x Investment) = $80,000 $72,727 + (0. 12 x $72,727. 20) =$80,000 $72,727 + $7,273 = $80,000 $80,000 = $80,000
B. Identify the factors that cause the present value of the retirement benefit to be less than $600,000 Inflation is one factor that could affect the present value of the retirement benefit. Taxes is another factor that could affect the present value of the retirement benefit. Exercise 16-5Determining net present value Metro Shuttle Inc. is considering investing in two new vans that are expected to generate com- bined cash inflows of $28,000 per year. The vans’ combined purchase price is $91,000. The ex- pected life and salvage value of each are four years and $21,000, respectively.
Metro Shuttle has an average cost of capital of 14 percent Required a. Calculate the net present value of the investment opportunity. |Present Value |FV X PRESENT VALUE |= Present Value Equivalent | |Period 1 |28,000 X 0. 877193 |$24,561 | |Period 2 |28,000 X 0. 769468 |21,545 | |Period 3 |28,000 X 0. 74972 |18,899 | |Period 4 |28,000 X 0. 592080 |16,578 | | |TOTAL |$ 81,583 | b. Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital and whether it should be accepted. The investment opportunity is anticipated to earn a return that is below the cost of capital. The investment should not be accepted.