E10–2 Time allowed: 15 minutes Each of the following parts is independent. (Ignore income/corporation taxes.)

1 The Atlantic Medical Clinic can purchase a new computer system that will save £7,000 annually in billing costs. The computer system will last for eight years and have no salvage value. What is the maximum purchase price that the Atlantic Medical Clinic should be willing to pay for the new computer system if the clinic’s required r,ate of return is:

(a) 16%?

(b) 20%?

2 The Caldwell Herald newspaper reported the following story:

Frank Ormsby of Caldwell is the state’s newest millionaire. By choosing the six winning numbers on last week’s state lottery, Mr Ormsby has won the week’s grand prize totalling £1.6 million. The State Lottery Commission has indicated that Mr Ormsby will receive his prize in 20 annual instalments of £80,000 each.

(a) If Mr Ormsby can invest money at a 12% rate of return, what is the present value of his winnings?

(b) Is it correct to say that Mr Ormsby is the ‘state’s newest millionaire’?

Explain your answer.
3 Fraser Company will need a new warehouse in five years. The warehouse will cost £500,000 to build. What lump-sum amount should the company invest now to have the £500,000 available at the end of the five-year period? Assume that the company can invest money at:

(a) 10%?

(b) 14%?