Gulf Coast Inc.is considering investing in a project that willcost $152,000 and have no salvage value at the end of its 5-yearlife. It is estimated that the project will generate annual cashinflows of $40,000 each year. The company has a hurdle or cutoffrate of return of 9%.
Instructions
A)Using the internal rate of return method calculate anapproximate interest yield for the project. (use tables fromAppendix D)
B)Should this project be accepted by Humana Inc.andwhy?
SHOW WORK WHERE NEEDED
Gulf Coast Inc.is considering investing in a project that willcost $152,000 and have no salvage value at the end of its 5-yearlife. It is estimated that the project will generate annual cashinflows of $40,000 each year. The company has a hurdle or cutoffrate of return of 9%.
Instructions
A)Using the internal rate of return method calculate anapproximate interest yield for the project. (use tables fromAppendix D)
B)Should this project be accepted by Humana Inc.andwhy?
SHOW WORK WHERE NEEDED
Related questions
| Directions: Yourassignment this week is to answer the four questions below. Pleasenote that Question #1 has 2 parts, Part A and Part B. Please showyour work for full credit and use the box provided. Please add morerows or columns to the box if needed. | ||||||||
| 1. Gomez Corporation isconsidering two alternative investment proposals with the followingdata: | ||||||||
| Proposal X | Proposal Y | |||||||
| Investment | $850,000 | $468,000 | ||||||
| Useful life | 8 years | 8 years | ||||||
| Estimated annual net | $125,000 | $78,000 | ||||||
| cash inflows for 8 years | ||||||||
| Residual value | $40,000 | $ - | ||||||
| Depreciation method | Straight-line | Straight-line | ||||||
| Required rate of return | 14% | 10% | ||||||
| 1a. How long is the paybackperiod for Proposal X? | ||||||||
| 1b. What is the accountingrate of return for Proposal Y? | ||||||||
| 2. You have beenawarded a scholarship that will pay you $500 per semester at theend of each of the next 8 semesters that you earn a GPA of 3.5 orbetter. You are a very serious student and you anticipate receivingthe scholarship every semester. Using a discount rate of 3% persemester, which of the following is the correct calculation fordetermining the present value of the scholarship? PLEASE STATE WHYYOU CHOSE THE ANSWER THAT YOU DID. | ||||||||
| A) PV = $500 Ã 3% Ã 8 | ||||||||
| B) PV = $500 Ã (Annuity PV factor, i = 3%, n =8) | ||||||||
| C) PV = $500 Ã (Annuity FV factor, i = 6%, n =4) | ||||||||
| D) PV = $1,000 Ã (PV factor, i = 3%, n = 4) | ||||||||
| 3. Maersk MetalStamping is analyzing a special investment project. The projectwill require the purchase of two machines for $30,000 and $8,000(both machines are required). The total residual value at the endof the project is $1,500. The project will generate cash inflows of$11,000 per year over its 8-year life. | ||||||||
| If Maersk requiresa 6% return, what is the net present value (NPV) of this project?(Use present value tables or Excel.) | ||||||||
| 4. HincapieManufacturing is evaluating investing in a new metal stampingmachine costing $30,924. Hincapie estimates that it will realize$12,000 in annual cash inflows for each year of the machine's3-year useful life. | ||||||||
| Approximately,what is the the internal rate of return (IRR) for the machine? (Usepresent value tables or Excel.) | ||||||||
QUESTION 1
Which of the following statements is correct regarding thepayback method as a capital budgeting technique?
The payback method considers the time value of money. | ||
An advantage of the payback method is that it indicates if aninvestment will be profitable. | ||
The payback method provides the years needed to recoup theinvestment in a project. | ||
Payback is calculated by dividing the annual cash inflows by thenet investment. |
0.625 points
QUESTION 2
Taxes are not an important consideration indeveloping cash flow assessments.
True
False
0.625 points
QUESTION 3
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT (2)QUESTIONS:
Parkways Inc. is considering the purchase of a new machine. Themachine will cost $60,000 to purchase and will generate $15,000 ofcash revenues per year for the next 8 years. The machine will cost$1,000 per year to operate & maintain. At the end of it'suseful life, it has an estimated salvage value of $5,000. Parkwaysrequires a minimum rate of return of 14% for this class of asset.Determine the Net Present Value of this investment proposal.
PV of $1 (14%, 8n) is .351; PVOA (14%, 8n) is 4.639
$6,701 | ||
$57,000 | ||
$1,166 | ||
$0 |
0.625 points
QUESTION 4
Sun Devil Corporation is adding a new product line that willrequire an investment of $138,000. The product line is estimated togenerate net cash flows of $25,000 the first year, $23,000 thesecond year, and $18,000 each year thereafter for ten more years.What is the payback period?
7.26 | ||
5.52 | ||
7.00 | ||
7.67 |
0.625 points
QUESTION 5
Sparky Company invested in an asset with a useful life of 5years. The companys required rate of return is 10% for this classof asset. The net cash flows are estimated to be $7,610 per yearfor the next 5 years and no salvage value is anticipated.
If the asset generates a positive net present value of $2,000,what was the amount of the original investment? (Roundyour answer to the nearest whole dollar. Do not use $signs or commas in recording youranswer. EXAMPLE: If you answer is $22,516,enter your answer as 22516).
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 6
Suppose Whole Foods is considering investing inwarehouse-management software that costs $500,000, has $60,000residual value and should lead to cash cost savings of $130,000 peryear for its five-year life. Determine the NPV of the investment ifmanagement uses a 12% discount rate. (Round to the nearest wholenumber for your final answer. When recording your answer, do notuse $ dollar signs or commas. EXAMPLE: If you answer is $12,251,enter 12251)
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 7
ABC, Corporation is looking to purchase a new piece of equipmentfor $121,505. The equipment has a useful life of 8 years and noexpected salvage value.
The minimum desired rate of return is 10%. ABC is uncertain asto the annual net cash flows the equipment will generate.
What is the minimum annual net cashflow ABC must achieve in order to justify the purchase of this newequipment?
(Round your answer to the nearest whole dollar. Do not use $dollar signs or commas when recording your answer.)
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
0.625 points
QUESTION 8
Sparky Company is considering the replacement of an old machinewith the purchase of a new piece of production equipment that willreduce labor and maintenance costs by $45,000 peryear. If Sparky purchases the new machine, the companywill sell the old equipment for an estimated $20,000 salvage value.Data related to the new machine follows:
InitialInvestment $300,000
UsefulLife 10years
Salvagevalue (newmachine) $30,000
HurdleRate 12%
Assume all cash flows occur at the end of the year and ignoreincome taxes. Calculate the net present value of theinvestment in the new machine. (Round your answer to the nearestwhole dollar. If you have a negative NPV, record youranswer using () parenthesis. EXAMPLE: If yourNPV is ($2,000), enter your answer as (2000).
Present Value of $1 | |||
Periods | 10% | 12% | 14% |
5 | .621 | .567 | .519 |
8 | .467 | .404 | .351 |
10 | .386 | .322 | .270 |
Present Value of Ordinary Annuity | |||
Periods | 10% | 12% | 14% |
5 | 3.791 | 3.605 | 3.433 |
8 | 5.335 | 4.968 | 4.639 |
10 | 6.145 | 5.650 | 5.216 |
