Question 1

Sean and Jessica want to sell their interest in a small business. They have received two offers. If they accept Offer A they will receive $40 000 immediately and $30 000 in two years. If the accept Offer B they will receive $50000 now and $2000 at the end of every six months for 5 years. If interest is 8%, which offer is preferable?

Accepted Answer

p =  -1 = .0392305
ALT. A = 40000.00 + 30000.00(1.08)-2
= 40000.00 + 30000.00(.857339) =40000.00 + 25720.16 = $65720.16=$65 720.
ALT. B = 50000.00 + 2000.00  = 50000.00 + 2000.00(8.142056025) =50000.00 + 16284.11 = $66284.11=$66 284. BEST

Question 2

Donna and Keith want to sell their business. They have received two offers. If they accept Offer A they will receive $61 000 immediately and $20 000 in three years. If the accept Offer B they will receive $37000 now and $3000 at the end of every six months for 5 years. If interest is 6.67%, which offer is preferable?

Accepted Answer

p =  -1 = .0328117
ALT. A = 61000.00 + 20000.00(1.0667)-3
= 61000.00 + 20000.00(.8238974) = 61000.00 + 16477.95 = $77477.95=$77 478. BEST
ALT. B = 37000.00 + 3000.00  = 37000.00 + 3000.00(8.4090961) = 37000.00 + 25227.29 = $62227.29=$62 227.

Question 3

A company has two investment choices. Alternative A requires an immediate outlay of $4000.00 and offers a return of $14 000.00 after seven years. Alternative B requires an immediate outlay of $3600.00 in return for which $500.00 will be received at the end of every six months for the next seven years. If the rate of return is 6% compounded semi-annually, determine which alternative is preferable.

Accepted Answer

Alterative A:
PV of 14 000: n = 7(2) = 14; i =  = 0.03; FV = 14 000; I/Y = 6; P/Y = C/Y = 2
PV = 14000  = $9 255.65
Programmed solution:  NPVA = 9255.65 - 4000.00 = $5255.65 =$5 256.
Alternative B:
PMT = 500; n = 7(2) = 14; i = 0.03; I/Y = 6; P/Y = C/Y = 2
PV = 500  = $5648.04
Programmed solution:  NPVB= 5648.04 - 3600.00 = $2048.04 = $2 048.
Since NPVA > NPVB, alternative A is preferred.

Question 4

A car costs $29 700. Alternatively, the car can be leased for three years by making payments of $540 at the beginning of each month and can be bought at the end of the lease for $14750. If interest is 9.2% compounded semi-annually, which alternative is preferable?

Accepted Answer

The answer of A car costs $29 700. Alternatively, the...

Question 5

You win a lottery and have a choice of taking $200 000.00 immediately or taking payments of $8000.00 at the end of every three months for ten years. Which offer is preferable if interest is 8% compounded quarterly?

Accepted Answer

The answer of You win a lottery and have a...

Question 6

An obligation can be settled by making a payment of $7500.00 now and a final payment of $10 000.00 in five years. Alternatively the obligation can be settled by payments of $750.00 at the end of every three months for five years. If interest rate is 10% compounded quarterly, determine the preferred alternative.

Accepted Answer

The answer of An obligation can be settled by making...

Question 7

Replacing old equipment at an immediate cost of $75 000 and an additional outlay of $10 000 six years from now will result in savings of $3120 per quarter for 11 years. The required rate of return is 8% compounded annually. Use the net present value method to determine whether the company should replace old equipment or not.

Accepted Answer

The answer of Replacing old equipment at an immediate cost...

Question 8

A piece of property may be acquired by making an immediate payment of $125 000 and payments of $37 500 and $50 000 three and five years from now respectively. Alternatively, the property may be purchased by making quarterly payments of $11 150 in advance for five years. Which alternative is preferable if money is worth 12.2% compounded semi-annually?

Accepted Answer

The answer of A piece of property may be acquired...

Question 9

Tamia Industries plans to replace the outdated equipment that will cost the company $100 000.00 now and $60 000.00 six years from now. This replacement will result in revenues of $6000.00 at the end of each quarter for twelve years. At an interest rate of 9% compounded annually and using the Net Present Value criterion, should the company replace this equipment or not?

Accepted Answer

The answer of Tamia Industries plans to replace the outdated...

Question 10

An expenditure may be met by outlays of $1 700 now and $2210 at the end of every six months for 6 years or by making monthly payments of $500 in advance for seven years. Interest is 11% compounded annually.
Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

Accepted Answer

The answer of An expenditure may be met by outlays...

Question 11

Replacing old equipment at an immediate cost of $75 000 and an additional outlay of $10 000 six years from now will result in savings of $3120 per quarter for 11 years. The required rate of return is 11.4% compounded annually. Use the net present value method to determine whether the company should replace old equipment or not.

Accepted Answer

The answer of Replacing old equipment at an immediate cost...

Question 12

A telephone system with a disposable value of $4200 after five years can be purchased for $16 600. Alternatively, a leasing agreement is available that requires an immediate payment of $1900 plus payments of $150.00 at the beginning of each month for five years. If money is worth 9.6% compounded monthly, should the telephone system be leased or purchased?

Accepted Answer

The answer of A telephone system with a disposable value...

Question 13

A new car costs $21 000. Alternatively, the car can be leased for three years by making payments of $360 at the beginning of each month and can be bought at the end of the lease for $10 000. If interest is 8% compounded semi-annually, which alternative is preferable?

Accepted Answer

The answer of A new car costs $21 000. Alternatively,...

Question 14

A selection has to be made between two investment alternatives. The first alternative offers a net return of $47 000.00 after three years, $30 000.00 after five years and $26 000.00 after seven years. The second alternative provides a net return of $13 000.00 per year for seven years. Determine the preferred alternative according to the discounted cash flow criterion if money is worth 11%.

Accepted Answer

The answer of A selection has to be made between...

Question 15

A contract is estimated to yield net returns of $7000.00 quarterly for seven years. To secure the contract, an immediate outlay of $80 000.00 and a further outlay of $60 000.00 three years from now are required. If interest is 6% compounded quarterly, determine if the investment should be accepted or rejected.

Accepted Answer

The answer of A contract is estimated to yield net...

Question 16

An obligation can be settled by making a payment of $12 000 now and a final payment of $32 000 in 4 years. Alternatively, the obligation can be settled by payments of $2700 at the end of every three months for five years. Interest is 10% compounded quarterly.
Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

Accepted Answer

The answer of An obligation can be settled by making...

Question 17

A wireless telephone system with a disposable value of $5 000 after five years can be purchased for $15 000. Alternatively, a leasing agreement is available that requires an immediate payment of $2000 plus payments of $100.00 at the beginning of each month for five years. If money is worth 6% compounded monthly, should the telephone system be leased or purchased?

Accepted Answer

The answer of A wireless telephone system with a disposable...

Question 18

An investment project requires an initial expenditure of $160 000.00 with a salvage value of $30 000.00 after ten years. It is estimated that it will have annual returns of $21 000.00 for ten years. Should the company undertake this project if it wants to achieve a 9% rate of return?

Accepted Answer

The answer of An investment project requires an initial expenditure...

Question 19

An obligation can be settled by making a payment of $16 000 now and a final payment of $30 000 in 3 years. Alternatively, the obligation can be settled by payments of $2500 at the end of every three months for four years. Interest is 12% compounded quarterly.
Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

Accepted Answer

The answer of An obligation can be settled by making...

Question 20

An expenditure may be met by outlays of $3 000 now and $1000 at the end of every six months for 5 years or by making monthly payments of $250 in advance for three years. Interest is 12% compounded annually.
Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

Accepted Answer

The answer of An expenditure may be met by outlays...

Quiz 16: Investment Decision Applications

A car costs $29 700. Alternatively, the car can be leased for three years by making payments of $540 at the beginning of each month and can be bought at the end of the lease for $14750. If interest is 9.2% compounded semi-annually, which alternative is preferable?

You win a lottery and have a choice of taking $200 000.00 immediately or taking payments of $8000.00 at the end of every three months for ten years. Which offer is preferable if interest is 8% compounded quarterly?

A new car costs $21 000. Alternatively, the car can be leased for three years by making payments of $360 at the beginning of each month and can be bought at the end of the lease for $10 000. If interest is 8% compounded semi-annually, which alternative is preferable?

An investment project requires an initial expenditure of $160 000.00 with a salvage value of $30 000.00 after ten years. It is estimated that it will have annual returns of $21 000.00 for ten years. Should the company undertake this project if it wants to achieve a 9% rate of return?