Question 1

Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $80,000 per year for 5 years.Assuming an 8% discount rate,calculate the present value of the cash savings.

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Question 2

Hillsdale is considering two options for comparable computer software.Option A will cost $25,000 plus annual license renewals of $1,000 for three years,which includes technical support.Option B will cost $20,000 with technical support being an add-on charge.The estimated cost of technical support is $4,000 the first year,$3,000 the second year,and $2,000 the third year.Assume the software is purchased and paid for at the beginning of year one,but that technical support is paid for at the end of each year.The discount rate is 8%.Ignore income taxes.Determine which option should be chosen based on present value considerations.

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Question 3

Which three factors are necessary in calculating the present value of a single amount?

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Question 4

What is the relationship between the present value of a single amount and the present value of an annuity?

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Question 5

Briefly describe the difference between simple interest and compound interest.

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Question 6

Explain the difference between present value and future value.

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Question 7

Two banks each have stated CD rates of 12%.Bank A compounds quarterly and Bank B compounds semiannually.Explain which bank offers the better CD.

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Question 8

Briefly explain why the value of $100 received today is greater than the value of $100 received one year from now.

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Question 9

Dobson Contractors is considering buying equipment at a cost of $75,000.The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000.The discount rate is 12%.Assume the equipment would be paid for on the first day of year one,but that all other cash flows occur at the end of the year.Ignore income tax considerations.Determine if Dobson should purchase the machine.

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Question 10

If you had an investment opportunity that promises to pay you $20,000 in three years and you could earn a 10% annual return investing your money elsewhere,what is the most you should be willing to invest today in this opportunity?

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Question 11

Touche Manufacturing is considering a rearrangement of its manufacturing operations.A consultant estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year,$10,000 for the next two years,and $12,000 for the next two years.Assuming a 12% discount rate,calculate the total present value of the cash flows.

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Question 12

Samson Inc.is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $100,000 per year for 8 years.Assuming a 10% discount rate,calculate the present value of the cash savings.

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Question 13

DON Corp.is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for 5 years.At the end of five years,the machine can be sold to realize after-tax cash flows of $5,000.Assuming a 12% discount rate,calculate the total present value of the cash savings.

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Question 14

Baird Bros.Construction is considering the purchase of a machine at a cost of $125,000.The machine is expected to generate cash flows of $20,000 per year for ten years and can be sold at the end of ten years for $10,000.The discount rate is 10%.Assume the machine would be paid for on the first day of year one,but that all other cash flows occur at the end of the year.Ignore income tax considerations.Determine if Baird should purchase the machine.

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Quiz 13: Time Value of Money