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Question : Learning Objective 21-3 1) If Teddy Godfried invests $400,000 today

Learning Objective 21-3

1) If Teddy Godfried invests $400,000 today at a rate of 9% compounding yearly, his investment will grow to $1,000,000 in 10 years.

Future Value of $1

4%

5%

6%

7%

8%

9%

1

1.040

1.050

1.060

1.070

1.080

1.090

2

1.082

1.103

1.124

1.145

1.166

1.188

3

1.125

1.158

1.191

1.225

1.260

1.295

4

1.170

1.216

1.262

1.311

1.360

1.412

5

1.217

1.276

1.338

1.403

1.469

1.539

6

1.265

1.340

1.419

1.501

1.587

1.677

7

1.316

1.407

1.504

1.606

1.714

1.828

8

1.369

1.477

1.594

1.718

1.851

1.993

9

1.423

1.551

1.689

1.838

1.999

2.172

10

1.480

1.629

1.791

1.967

2.159

2.367

2) Simms Manufacturing is considering two alternative investment proposals with the following data:

Proposal X

Proposal Y

Investment

$620,000

$400,000

Useful life

8 years

8 years

Estimated annual net cash inflows for 8 years

$130,000

$80,000

Residual value

$0

$0

Depreciation method

Straight-line

Straight-line

Discount rate

9%

10%

Present Value of an Annuity of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

1.859

1.833

1.808

1.783

1.759

1.736

3

2.723

2.673

2.624

2.577

2.531

2.487

4

3.546

3.465

3.387

3.312

3.240

3.170

5

4.329

4.212

4.100

3.993

3.890

3.791

6

5.076

4.917

4.767

4.623

4.486

4.355

7

5.786

5.582

5.389

5.206

5.033

4.868

8

6.463

6.210

5.971

5.747

5.535

5.335

9

7.108

6.802

6.515

6.247

5.995

5.759

10

7.722

7.360

7.024

6.710

6.418

6.145

After calculating the net present value of the two alternatives, Proposal Y appears to deliver the most

favorable results.

3) Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash inflows as follows:

Year 1

$100,000

Year 2

$100,000

Year 3

$125,000

Year 4

$125,000

Year 5

$75,000

Using the factors in the table below, please calculate the net present value of the net cash inflows above,

using a discount rate of 10%.  Please round all calculations to the nearest whole dollar.

Present Value of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

A) $399,325

B) $342,800

C) $401,667

D) $399,761

4) Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash inflows as follows:

Year 1

$100,000

Year 2

$100,000

Year 3

$125,000

Year 4

$125,000

Year 5

$75,000

Using the factors in the table below, please calculate the net present value of the investment project (including initial investment plus the NPV of the net cash inflows above) using a discount rate of 10%.  Please round all calculations to the nearest whole dollar.

Present Value of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

A) $41,667

B) $49,325

C) $41,667

D) $39,761

5) Sun Company is considering purchasing new equipment costing $350,000. Sun's management has estimated that the equipment will generate cash inflows as follows:

Year 1

$100,000

Year 2

$100,000

Year 3

$125,000

Year 4

$125,000

Year 5

$75,000

Using the table below, please calculate the profitability index of the project using a discount rate of 10%.  Please round all calculations to the nearest whole dollar.

Present Value of $1

5%

6%

7%

8%

9%

10%

1

0.952

0.943

0.935

0.926

0.917

0.909

2

0.907

0.890

0.873

0.857

0.842

0.826

3

0.864

0.840

0.816

0.794

0.772

0.751

4

0.823

0.792

0.763

0.735

0.708

0.683

5

0.784

0.747

0.713

0.681

0.650

0.621

A) 1.67

B) 2.07

C) 1.20

D) 1.14

6) Which of the following describes the term time value of money?

A) Money can only be used at certain times and for certain purposes.

B) Money loses its purchasing power over time through inflation.

C) Wasted time can result in wasted money.

D) When money is invested over time, it earns income and grows.

7) Which of the following MOST accurately describes the term annuity?

A) An investment which grows in value over time

B) An installment loan with amortizing principal payments

C) A stream of equal installments of cash payments

D) A term life insurance policy

8) If $1,000 is invested in an account with 4% interest compounding yearly, what will the balance of the account be after 4 years?  (You may ignore small differences that result from rounding.)

A) $1,218

B) $1,170

C) $1,040

D) $1,240

9) If $1,000 is invested in an account with 4% interest compounding yearly, what will the balance of the account be after 4 years?  Please refer to the following Future Value table:

Future Value of $1

4%

5%

6%

7%

1

1.040

1.050

1.060

1.070

2

1.082

1.103

1.124

1.145

3

1.125

1.158

1.191

1.225

4

1.170

1.216

1.262

1.311

5

1.217

1.276

1.338

1.403

6

1.265

1.340

1.419

1.501

A) $1,218

B) $1,170

C) $1,040

D) $1,240

10) If $2,000 is invested in an account with 5% interest compounding yearly, what will the balance of the account be after 6 years?  Please refer to the following Future Value table:

Future Value of $1

4%

5%

6%

7%

1

1.040

1.050

1.060

1.070

2

1.082

1.103

1.124

1.145

3

1.125

1.158

1.191

1.225

4

1.170

1.216

1.262

1.311

5

1.217

1.276

1.338

1.403

6

1.265

1.340

1.419

1.501

A) $1,340

B) $2,680

C) $2,676

D) $2,432

1

Solution
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