Basic present value calculations

1.
Basic present value calculations
Calculate
the present value of the following cash flows, rounding to the nearest dollar:
a. A single cash inflow of $12,000 in five years,
discounted at a 12% rate of return.
b. An annual receipt of $16,000 over the next 12
years, discounted at a 14% rate of return.
c. A single receipt of $15,000 at the end of Year
1 followed by a single receipt of $10,000 at the end of Year 3. The company has
a 10% rate of return.
d. An annual receipt of $8,000 for three years
followed by a single receipt of $10,000 at the end of Year 4. The company has a
16% rate of return.2.
Cash flow calculations and net present valueOn
January 2, 20X1, Bruce Greene invested $10,000 in the stock market and
purchased 500 shares of Heartland Development, Inc. Heartland paid cash
dividends of $2.60 per share in 20X1 and 20X2; the dividend was raised to $3.10
per share in 20X3. On December 31, 20X3, Greene sold his holdings and generated
proceeds of $13,000. Greene uses the net-present- value method and desires a
16% return on investments.a. Prepare a chronological list of the
investment’s cash flows. Note: Greene is entitled to the 20X3 dividend.b. Compute the investment’s net present value,
rounding calculations to the nearest dollar.
c. Given the results of part (b), should Greene
have acquired the Heartland stock? Briefly explain.3.
Straightforward net present value and internal rate of returnThe
City of Bedford is studying a 600-acre site on Route 356 for a new landfill.
The startup cost has been calculated as follows:Purchase
cost: $450 per acreSite
preparation: $175,000The
site can be used for 20 years before it reaches capacity. Bedford, which shares
a facility in Bath Township with other municipalities, estimates that the new
location will save $40,000 in annual operating costs.
a. Should the landfill be acquired if Bedford
desires an 8% return on its investment? Use the net-present-value method to
determine your answer.4.
Straightforward net-present-value and payback computationsSTL
Entertainment is considering the acquisition of a sight-seeing boat for summer
tours along the Mississippi River. The following information is available:Cost
of boat $500,000Service
life 10 summer seasonsDisposal
value at the end of 10 seasons $100,000Capacity
per trip 300 passengersFixed
operating costs per season (including straight-line depreciation) $160,000Variable
operating costs per trip $1,000Ticket
price $5 per passengerAll
operating costs, except depreciation, require cash outlays. On the basis of
similar operations in other parts of the country, management anticipates that
each trip will be sold out and that 120,000 passengers will be carried each
season. Ignore income taxes.Instructions:

By
using the net-present-value method, determine whether STL Entertainment should
acquire the boat. Assume a 14% desired return on all investments- round
calculations to the nearest dollar.5.
Equipment replacement decisionColumbia
Enterprises is studying the replacement of some equipment that originally cost
$74,000. The equipment is expected to provide six more years of service if
$8,700 of major repairs are performed in two years. Annual cash operating costs
total $27,200. Columbia can sell the equipment now for $36,000; the estimated
residual value in six years is $5,000.New
equipment is available that will reduce annual cash operating costs to $21,000.
The equipment costs $103,000, has a service life of six years, and has an
estimated residual value of $13,000. Company sales will total $430,000 per year
with either the existing or the new equipment. Columbia has a minimum desired
return of 12% and depreciates all equipment by the straight-line method.Instructions:
a. By using the net-present-value method,
determine whether Columbia should keep its present equipment or acquire the new
equipment. Round all calculations to the nearest dollar, and ignore income
taxes.
b. Columbia’s management feels that the time
value of money should be considered in all long-term decisions. Briefly discuss
the rationale that underlies management’s belief.