NAME: Your name on this document is required in order to earn the bonus points. CHAPTER 14 BONUS PROBLEMS (increase spacing below as needed to show your work) Pruent Value of In Annuity of l. Use the present value of an annulty Mods 5% 3% 9% 10% 12% 14% l .943 .926 .917 .909 .893 .877 of 1 table shown below for any of 2 1.333 1.733 1.759 1.735 1. 690 L647 the next questions that need 5 2.673 2.577 2.531 2.435 2.402 2.322 . 4 3.465 3.312 3240 3.170 3.037 2.914 present value calculations. Show your computations for eaCh 117 7.360 6.710 6.418 15.145 5.650 5.215 question in the areas provided either on the side or below each question. 1' Sutton Co. has a minimum required rate of return of 8%. The company is considering investing in a factory machine which costs $75,000 and has an expected life of 3 years. The machine has a zero salvage value and will be depreciated using the straightline depreciation method. The company expects to generate an extra $5,000 of net income each of the next 3 years because of this new factory machine and extra annual cash ows of $30,000 each of the 3 years the asset will be used. Show the calculations you use under each area below. a. Show how the $30000 annual cash ow was computed from the $5,000 net income gure. In other words, if you were given the $5,000 net income but not the $30,000 cash ow amount, how would you compute it? b. Compute the present value of the cash receipts. $ c. What is the n_et present value of the investment in the factory machine? $ (1. Is the net present value a negative or positive value? 2. Sutton Co. has provided the following data concerning an investment project that it is considering: Lu P o :2 Initial investment Working capital requirement at the beginnin Annual cash ow Salvage value at the end of the project Expected life of the project nicnnllnt mm to II. I l Va lv'il l'.) Ia! 2. Sutton Co. has provided the following data concerning an investment project that it is considering: E 50,00 . - Working capital requirement at the beginning 40,00l- Annual cash ow r 20,00 I Salvage value at the end of the project E 20,001- Expected life of the project I-m I-- The present value of $1 factors at 10% for year 1, year 2, and year 3 are: .909 .826 .751 The present value of an annuity of $1 factors are shown in a table on page 1. The working capital would be released for use elsewhere at the end of the project. a. What is the net present value of the project? $ b. Is it a positive or negative number? Show the numbers on the side to calculate the net present value. 3. If a project has a negative net present value of ($20,480) on a $194,500, 3- year investment with a required rate of return of 10% and annual cash ows of $70,000, how much would cash ows have to increase to reach a zero net present value and the 10% desired rate of retum? The present value of annuity of $1 for 3 years with a 10% required rate of return is 2.486 4. Sutton Company estimates annual net income from a new asset that will cost $219,000 and will last 12 years with a $3,000 salvage value as follows: Sales $110,000 Rent expense $ 5,000 Depreciation expense 10,000 Other expenses , 90434.0 Net Income $20,000 years a. Compute the payback period on this project. This is computed by dividing by (use numbers, not words). % b. Compute the simple rate of return. This is computed by dividing by (use numbers, not words 4. Sutton Company estimates annual net income from a new asset that will cost $219,000 and will last 12 years with a $3,000 salvage value as follows: Sales $110,000 Rent expense $ 5,000 Depreciation expense 10,000 Other expenses ,M 90% Net Income $20,000 years a. Compute the payback period on this project. This is computed by dividing by (use numbers, not words). % b. Compute the simple rate of return. This is computed by dividing by (use numbers, not words). c. $ If the new asset will replace an old asset that will be sold for $26,000, what amount would you use for the cost of the new asset? 5. Sutton Company has estimated the annual revenues and expenses for a project it is considering (listed below) that will cost a total of $525,000, have a ten-year useful life, and has a salvage value of $25,000. The company requires a payback period of 6 years or less. Show your computations for each question in the areas provided under each question below. __ - -- - 50,000 _ Low _254,m _ $ 46.000 a)Using the information above, what is the expected annual cash ow for this company? $ b) What is the payback period? Would the company consider this project? c) What is the internal rate of return to the nearest percent? % (between and %) HINT: For this answer, there are no further computations since you already have the payback period. You need to nd the answer in the PV table above, You can estimate the amount if the exact number isn't there. d) What is the simple rate of return promised by the project? If the company requires a simple rate of return of at least 8%, will the games be purchased