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.
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 =...