Mini Case 9-4 Essay
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. …show more content…
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 taxes).Should the investment be undertaken if the required rate of return is 18 percent?
The investment should not be undertaken because the internal rate of return of 15% is less than the required rate of 18%.
Initial outlay $100,000 Annuity amount 20,000
Outlay ÷ annuity amount = PV of annuity factor 5.00
Internal rate of return 15%
EXERCISE 9-11. Depreciation Tax Shield [LO 4] Strauss Corporation is making a $60,000 investment in equipment with a five-year life.The company uses the straight-line method of depreciation and has a tax rate of 40 percent.The company’s required rate of return is 12 percent. Required What is the present value of the tax savings related to depreciation of the equipment?
Annual depreciation $60,000 ÷ 5 years $12,000.00 Annual tax savings $12,000 .40 $4,800.00
Present value of $4,800 per year for 5 years at 12% $4,800 3.6048
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. …show more content…
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 taxes).Should the investment be undertaken if the required rate of return is 18 percent?
The investment should not be undertaken because the internal rate of return of 15% is less than the required rate of 18%.
Initial outlay $100,000 Annuity amount 20,000
Outlay ÷ annuity amount = PV of annuity factor 5.00
Internal rate of return 15%
EXERCISE 9-11. Depreciation Tax Shield [LO 4] Strauss Corporation is making a $60,000 investment in equipment with a five-year life.The company uses the straight-line method of depreciation and has a tax rate of 40 percent.The company’s required rate of return is 12 percent. Required What is the present value of the tax savings related to depreciation of the equipment?
Annual depreciation $60,000 ÷ 5 years $12,000.00 Annual tax savings $12,000 .40 $4,800.00
Present value of $4,800 per year for 5 years at 12% $4,800 3.6048