QUESTION 1:
QUESTION 2:
Allegience Insurance Company's management is considering an advertising program that would require an initial expenditure of $173,775 and bring in additional sales over the next five years. The projected additional sales revenue in year 1 is $80,000, with associated expenses of $27,500. The additional sales revenue and expenses from the advertising program are projected to increase by 10 percent each year. Allegience's tax rate is 40 percent. (Hint: The $173,775 advertising cost is an expense.) Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Compute the payback period for the advertising program. 2. Calculate the advertising programs net present value, assuming an after-tax hurdle rate of 10 percent. (Round your intermediate and final answers to the nearest whole dollar.) years 1. Payback period 2. Net present value Future Value and Present Value Tables Table I Future Value of $1.00/1 + 1 Period 4% 6% 8% 10% 12% 14% 20% 1 2 3 4 5 6 1.040 1.082 1.125 1.170 1.217 1.060 1.124 1.191 1.263 1.338 1.080 1.166 1.260 1.361 1.469 1.587 1.714 1.851 1.999 2.159 7 8 9 1.419 1.504 1.594 1.690 1.791 1.100 1.210 1.331 1.464 1.611 1.772 1.949 2.144 2.359 2.594 2.853 3.139 3.452 1.286 1.316 1.369 1.423 1.480 1.540 1.601 1.666 1.732 1.801 1.120 1.254 1,405 1.574 1.762 1.974 2.211 2.476 2.773 3.106 3.479 3.896 4.364 4,887 5.474 9.646 29.960 93.051 1.140 1.300 1.482 1.699 1.925 2196 2502 2.853 3.252 3.707 4.226 4.818 5.492 6.261 7.138 13.743 50.950 188.890 1.200 1.440 1.728 2074 2.488 2986 3.583 4.300 5.100 6.192 7.430 8.916 10.699 12839 15.407 38.338 237380 1,469.800 10 2332 2518 11 12 13 14 15 2.720 3.798 1.898 2.012 2.133 2.261 2.397 3.207 5.744 10.286 2.937 3.172 4.177 20 30 40 2.191 3.243 4.801 4.661 10.063 21.725 6.728 17.450 45.280 Period 6% 8% 10% 12% 14% 20% 1 Table II Future Value of a Series of 31.00 Cash Flows "Ordinary Annuity) 1 + - 1 1 2 3 4 5 6 7 8 1.000 2220 3.640 5.368 7.442 1.000 2.040 3.122 4.247 5.416 6.633 7.898 9.214 10.583 12.006 13.486 15.026 16.627 18.292 20.024 29.778 56,085 96.026 9 10 1.000 2060 3.184 4.375 5.637 6.975 8.394 9.898 11.491 13.181 14 972 16.870 188R2 21.015 23276 36.778 79,058 154.762 1.000 2.080 3.246 4.506 5.867 7.336 8.923 10.637 12.488 14.487 16.646 18.977 21.486 24.215 27.152 45.762 113.283 259.057 1.000 2.100 3.310 4.641 6.106 7.716 9.487 11.436 13.580 15.938 18.531 21.385 24.523 27.976 31.773 57.276 164.498 442.597 1.000 2.120 3.374 4.779 6.353 8.115 10,089 12.300 14.776 17.549 1.000 2.140 3.440 4.921 6.610 8.536 10.730 13.233 16,085 19.337 23.045 27271 32,089 37581 43.842 91.025 356.790 1,342.000 11 12 9.900 12916 16.499 20.799 25.969 32.150 39.580 48.497 59.196 72035 186.690 1,181.900 7,343.900 20.665 24,133 28.029 32.393 37.280 75,052 241.330 767.090 14 15 20 30 40 Table III Present Value of $1.00 1 Period 6% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 909 833 1 2 3 4 5 .943 .890 .840 .792 747 926 857 .794 .735 .826 .751 .683 862 .743 641 552 .847 .718 .609 694 579 .794 .630 .500 397 .516 482 962 925 889 855 822 .790 .70 .731 .703 .676 650 6 .681 630 583 540 500 .621 .564 .513 893 .797 .712 636 567 507 452 404 361 322 287 257 7 .437 .370 .314 266 225 .476 410 354 305 263 227 .706 .665 .627 .592 .558 .527 497 469 442 .877 .789 .675 .592 .519 458 400 .351 300 270 .237 208 182 180 .140 ,073 .020 2006 8 9 .758 .574 .435 329 .250 .189 .143 . 108 .082 .062 .315 250 .198 .157 .125 099 .820 .672 551 .451 .370 .306 249 204 167 .137 .112 .092 .075 082 051 .019 .003 .806 .660 .524 423 .341 275 222 .179 144 .116 .084 .076 .081 .049 .040 .014 .002 .781 .610 .477 .373 .291 .227 .178 .139 108 .085 .066 .064 .040 .032 025 .769 .592 .455 .350 .269 .207 .159 .123 .094 .073 ,056 ,043 .033 ,025 .020 .005 463 .191 10 11 12 13 14 15 429 397 402 335 279 233 194 .162 .135 .112 093 078 065 026 004 2001 424 .386 .360 319 290 263 .239 .149 .057 .022 .195 .168 .145 125 100 388 340 .162 .137 116 .099 084 .079 .062 .050 039 601 577 555 456 308 208 417 .047 .036 ,027 .021 .016 .004 315 229 205 .183 .104 ,033 011 20 .312 .174 .097 215 ,099 046 30 051 2012 2003 .031 .010 .001 .037 .007 001 .007 .001 40 - Table IV Present Value of Series of $1.00 Cash Flows 1 | + 1)/ H-votos) Period 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 25% 26% 28% 30% 1 2 3 4 5 6 7 0.962 1.896 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 0.943 1.833 2673 3.465 4.212 4.917 5.582 6.210 6.902 8 9 0.926 0.909 0.893 1.783 1.736 1.690 2.577 2.497 2.402 3.312 3.170 3.037 3.993 3.791 3.606 4.623 4,355 4.111 5206 4.868 4.564 5.747 5.335 4.968 6247 5.759 5.3.29 6.710 6.145 5.650 7.139 6.496 5.938 7.536 6.814 6.194 7904 7.103 6.424 8244 6.628 8.559 7.606 6.811 9.818 8.514 7.489 11258 9.427 8.066 11.925 9.779 8.244 0.877 1.647 2.322 2.914 3.433 3.889 4 288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.623 7.003 7.106 0.862 0.847 1.605 1.566 2.246 2.174 2.798 2.690 3.274 3.127 3.685 3.498 4.039 3.812 4344 4.078 4.607 4.303 4.833 4.494 5.029 4.656 5.197 4.793 5.342 4.910 5.468 5.008 5.575 5.092 5.929 5.353 6.177 5.517 6.234 5.548 0.833 0.820 0.806 0.800 1.528 1.492 1.457 1.440 2.106 2.042 1.981 1.962 2.589 2.494 2.404 2.362 2.991 2.864 2.745 2.689 3.326 3.167 3.020 2.961 3.606 3.416 3.242 3.161 3.837 3.619 3.421 3.329 4.001 3.786 3.566 3.463 4.192 3.923 3.682 3.571 4.327 4.035 3.776 3.656 4.439 4.127 3.851 3.725 4.533 4200 3.912 3.780 4.611 4.266 3.962 3.824 4.675 4.315 4.001 3.859 4.870 4480 4.110 3.964 4.979 4.534 4.160 3.995 4.997 4.544 4.166 3.999 0.794 1.424 1.923 2.320 2.636 2.885 3.083 3.241 3.366 3.476 3.544 3.606 3.656 3.686 3.726 3.808 3.842 3.846 0.781 1.382 1.888 2.241 2.532 2.759 2.937 3.076 3.184 3.280 3.335 3.387 3427 3.459 3.483 3.546 3.589 3.571 0.789 1.361 1.816 2.168 2436 2.643 2.802 2.925 3.019 3.092 3.147 3.190 3.223 3.249 3.268 3.316 3.332 3.333 10 11 12 13 14 8.760 9.385 9.986 10.563 11.118 13.590 17.292 19.793 7.360 7.887 8.384 8.853 9.295 9.712 11.470 13.765 15.046 15 20 30 40 The state's Secretary of Education is considering the purchase of a new computer for $111,000. A cost study indicates that the new computer should save the Department of Education $37,000, measured in real dollars, during each of the next eight years. The real interest rate is 20 percent and the inflation rate is 10 percent. As a governmental agency, the Department of Education pays no taxes. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Prepare a schedule of cash flows measured in real dollars. Include the initial acquisition and the cost savings for each of the next eight years. (Round "Discount Factor" to 3 decimal places. Negative amounts should be indicated by a minus sign.) Year Cash Flow in Real Dollars Discount Factor (real interest rate = 0.20) Present Value 0 1 2 3 4 5 6 7 8 ! Required information [The following information applies to the questions displayed below.] The state's Secretary of Education is considering the purchase of a new computer for $111,000. A cost study indicates that the new computer should save the Department of Education $37,000, measured in real dollars, during each of the next eight years. The real interest rate is 20 percent and the inflation rate is 10 percent. As a governmental agency, the Department of Education pays no taxes. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) 2. Using cash flows measured in real dollars, compute the net present value of the proposed computer. Use a real discount rate equal to the real interest rate. Net present value ! Required information [The following information applies to the questions displayed below.] The state's Secretary of Education is considering the purchase of a new computer for $111,000. A cost study indicates that the new computer should save the Department of Education $37,000, measured in real dollars, during each of the next eight years. The real interest rate is 20 percent and the inflation rate is 10 percent. As a governmental agency, the Department of Education pays no taxes. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Compute the nominal interest rate. (Enter your answer as a decimal not as a percentage (e.g., enter 12% as 0.12).) Nominal interest rate The state's Secretary of Education is considering the purchase of a new computer for $111,000. A cost study indicates that the new computer should save the Department of Education $37,000, measured in real dollars, during each of the next eight years. The real interest rate is 20 percent and the inflation rate is 10 percent. As a governmental agency, the Department of Education pays no taxes. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) 2. Prepare a schedule of cash flows measured in nominal dollars. Use a nominal discount rate equal to the nominal interest rate. (Negative amounts should be indicated by a minus sign. Round the "Price Index" to 4 decimal places, the "Discount Factor" to 3 decimal places, and other answers to the nearest dollar amount.) Year Cash Flow in Real Dollars Price Index Cash Flow in Nominal Dollars Discount Factor Present Value 0 1 2 3 4 5 6 7 8 Required information [The following information applies to the questions displayed below.) The state's Secretary of Education is considering the purchase of a new computer for $111,000. A cost study indicates that the new computer should save the Department of Education $37,000, measured in real dollars, during each of the next eight years. The real interest rate is 20 percent and the inflation rate is 10 percent. As a governmental agency, the Department of Education pays no taxes. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.) 3. Using cash flows measured in nominal dollars, compute the net present value of the proposed computer. Use a nominal discount rate equal to the nominal interest rate. (Round your answer to the nearest dollar amount.) Net present value
