1. An increase in the discount rate:
A) will increase the present value of future cash flows.
B) will have no effect on net present value.
C) will reduce the present value of future cash flows.
D) is one method of compensating for reduced risk.
2. Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the lease will be $2,468. The first payment will be at the end of the current year and all subsequent payments will be made at year-ends. If the discount rate is 5%, the present value of the lease payments is closest to (Ignore income taxes.):
See separate handout to determine the appropriate discount factor(s) using table.
A) $12,528
B) $14,103
C) $14,808
D) $11,050
3. At an interest rate of 14%, approximately how much would you need to invest today if you wanted to have $2,000,000 in 10 years? (Ignore income taxes.)
See separate handout to determine the appropriate discount factor(s) using table.
A) $383,436
B) $540,000
C) $740,741
D) $1,043,200
4. A company wants to have $20,000 at the end of a ten-year period by investing a single sum now. How much needs to be invested in order to have the desired sum in ten years, if the money can be invested at 12%? (Ignore income taxes.)
See separate handout to determine the appropriate discount factor(s) using table.5
A) $3,254.68
B) $3,539.82
C) $6,440
D) $7,720
5. Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project's:
Payback
Net Present Value
Internal Rate of Return
A)
No
No
No
B)
Yes
Yes
Yes
C)
No
Yes
Yes
D)
No
Yes
No
THIS IS THE handout to determine the appropriate discount factor(s) using table.5
Time Value of Money Factor for the Present Value of a Sum
PV =FV * TVM Factor
Present Value of a Sum = FV * 1/ (1 + i) n
2%
3%
4%
5%
6%
8%
10%
12%
1
0.9804
0.9709
0.9615
0.9524
0.9434
0.9259
0.9091
0.8929
2
0.9612
0.9426
0.9246
0.9070
0.8900
0.8573
0.8264
0.7972
3
0.9423
0.9151
0.8890
0.8638
0.8396
0.7938
0.7513
0.7118
4
0.9238
0.8885
0.8548
0.8227
0.7921
0.7350
0.6830
0.6355
5
0.9057
0.8626
0.8219
0.7835
0.7473
0.6806
0.6209
0.5674
6
0.8880
0.8375
0.7903
0.7462
0.7050
0.6302
0.5645
0.5066
7
0.8706
0.8131
0.7599
0.7107
0.6651
0.5835
0.5132
0.4523
8
0.8535
0.7894
0.7307
0.6768
0.6274
0.5403
0.4665
0.4039
9
0.8368
0.7664
0.7026
0.6446
0.5919
0.5002
0.4241
0.3606
10
0.8203
0.7441
0.6756
0.6139
0.5584
0.4632
0.3855
0.3220
20
0.6730
0.5537
0.4564
0.3769
0.3118
0.2145
0.1486
0.1037
25
0.6095
0.4776
0.3751
0.2953
0.2330
0.1460
0.0923
0.0588
Time Value of Money Factor for the Present Value of an Annuity
PV = Annuity * TVM Factor
Present Value of an Annuity = X*((1-(1/(1+i)^n))/i)
2%
3%
4%
5%
6%
8%
10%
12%
1
0.9804
0.9709
0.9615
0.9524
0.9434
0.9259
0.9091
0.8929
2
1.9416
1.9135
1.8861
1.8594
1.8334
1.7833
1.7355
1.6901
3
2.8839
2.8286
2.7751
2.7232
2.6730
2.5771
2.4869
2.4018
4
3.8077
3.7171
3.6299
3.5460
3.4651
3.3121
3.1699
3.0373
5
4.7135
4.5797
4.4518
4.3295
4.2124
3.9927
3.7908
3.6048
6
5.6014
5.4172
5.2421
5.0757
4.9173
4.6229
4.3553
4.1114
7
6.4720
6.2303
6.0021
5.7864
5.5824
5.2064
4.8684
4.5638
8
7.3255
7.0197
6.7327
6.4632
6.2098
5.7466
5.3349
4.9676
9
8.1622
7.7861
7.4353
7.1078
6.8017
6.2469
5.7590
5.3282
10
8.9826
8.5302
8.1109
7.7217
7.3601
6.7101
6.1446
5.6502
20
16.3514
14.8775
13.5903
12.4622
11.4699
9.8181
8.5136
7.4694
25
19.5235
17.4131
15.6221
14.0939
12.7834
10.6748
9.0770
7.8431
1. An increase in the discount rate:
A) will increase the present value of future cash flows.
B) will have no effect on net present value.
C) will reduce the present value of future cash flows.
D) is one method of compensating for reduced risk.
2. Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the lease will be $2,468. The first payment will be at the end of the current year and all subsequent payments will be made at year-ends. If the discount rate is 5%, the present value of the lease payments is closest to (Ignore income taxes.):
See separate handout to determine the appropriate discount factor(s) using table.
A) $12,528
B) $14,103
C) $14,808
D) $11,050
3. At an interest rate of 14%, approximately how much would you need to invest today if you wanted to have $2,000,000 in 10 years? (Ignore income taxes.)
See separate handout to determine the appropriate discount factor(s) using table.
A) $383,436
B) $540,000
C) $740,741
D) $1,043,200
4. A company wants to have $20,000 at the end of a ten-year period by investing a single sum now. How much needs to be invested in order to have the desired sum in ten years, if the money can be invested at 12%? (Ignore income taxes.)
See separate handout to determine the appropriate discount factor(s) using table.5
A) $3,254.68
B) $3,539.82
C) $6,440
D) $7,720
5. Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project's:
| Payback | Net Present Value | Internal Rate of Return | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| A) | No | No | No | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| B) | Yes | Yes | Yes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| C) | No | Yes | Yes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| D) | No | Yes | No | THIS IS THE handout to determine the appropriate discount factor(s) using table.5
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Related questions
Werner Chemical, Inc., leased a protein analyzer on September30, 2016. The five-year lease agreement calls for Werner to makequarterly lease payments of $371,971, payable each September 30,December 31, March 31, June 30, with the first payment at September30, 2016. Werner's incremental borrowing rate is 12%. Depreciationis recorded on a straight-line basis at the end of each fiscalyear. The useful life of the equipment is five years. (FV of $1, PVof $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)(Use appropriate factor(s) from the tablesprovided.) |
| Required: |
| 1. | Determine the present value of the lease payments at September30, 2016. |
2. What amounts related to the lease wouldWerner report in its balance sheet at December 31, 2016 (ignoretaxes)?
liability:
assett:
3. What amounts related to the lease wouldWerner report in its income statement for the year ended December31, 2016 (ignore taxes)?
total expenses:
4.What amounts related to the lease wouldWerner report in its statement of cash flows for the year endedDecember 31, 2016 (ignore taxes)?
| Capital Lease | ||
| Interest Portion | ||
| Principal Portion |
The management of Opry Company, awholesale distributor of suntan products, is considering t hepurchase of a $29,000 machine that would reduce operating costs inits warehouse by $5,500 per year. At the end of the machine's8-year useful life, it will have no scrap value. The company'srequired rate of retum is 11%. (Ignore income taxes.)
Click here to view Exhibit 88-1 andExhibit 8B-2, to determine the appropriate discount factor(s) usingtable.
Required:
1. Determine the net present valueof the investment in the machine. (Any cash outflows should beindicated by a minus sign. Round discount factor(s) to 3 decimalplaces, intermediate to the nearest dollar amount.)
Present
Item Year(s) Cash Flow 11% Factor Value of
|
Cash Flows
1-8 h
2. \llh1at is the differencebetween the total, undiscounted cash inflows and cash outflows overthe entire life of the machine? (Any cash outflows should beindicated by a minus sign.)
Item Cash Flow Years TotalCash
Flows
! |
Annual cost savings $ 0
Initial investment $ 0
Net cash flow $
0
