Accounting chapter #9

Topics: Net present value, Cash flow, Internal rate of return, Investment, Rate of return / Pages: 9 (1456 words) / Published: May 1st, 2014
Solutions Guide: Please reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own.

Chapter 9: Exercises 9-4, 9-7, 9-8, 9-9, 9-11, 9-12, 9-14, 9-16 (pages 347-348) • Problems 9-7, 9-12, 9-17 (pages 351-355)

EXERCISE 9-4. Using Present Value Tables [LO 1] What is the present value of $600 per year for five years if the required return is 10 percent (answer using Table 2 in Appendix B).

Cash Present Value Flow Factor Total $600 3.7908 $2,274.48

EXERCISE 9-7. Calculate Present Value [LO 2] Juanita Martinez is ready to retire and has a choice of three pension plans. Plan A provides for an immediate cash payment of $200,000. Plan B provides for the payment of $20,000 per year for 10 years and the payment of $200,000 at the end of year 10. Plan C will pay $35,000 per year for 10 years. Juanita Martinez desires a return of 8 percent.Determine the present value of each plan and select the best one.

Plan A Total $200,000

Plan B Cash Present Value Flow Factor Total $ 20,000 6.7101 $134,202 200,000 .4632 92,640 $226,842

Plan C Cash Present Value Flow Factor Total $35,000 6.7101 $234,853.50

Plan C should be selected as it has the highest present value.

EXERCISE 9-8. Calculate Net Present Value [LO 2] An investment that costs $60,000 will return $25,000 per year for five years.Determine the net present value of the investment if the required rate of return is 14 percent. (Ignore taxes.) Should the investment be undertaken? Cash Present Value Flow Factor Total ($60,000) 1.0000 ($60,000.00) 25,000 3.4331 85,827.50 $ 25,827.50

EXERCISE 9-9. Calculate the Internal Rate of Return [LO 3] An investment that costs $100,000 will reduce operating costs by $20,000 per year for 10 years.Determine the internal rate of return of the investment (ignore

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