# Determining the present value of a lump-sum future cash receipt

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Exercise 24-3A Determining the present value of a lump-sum future cash receipt

Ginger Smalley expects to receive a $300,000 cash benefit when she retires five years from today. Ms.Smalley's employer has offered an early retirement incentive by agreeing to pay her $180,000 today if she agrees to retire immediately. Ms. Smalley desires to earn a rate of return of 12 percent.

Required

a. Assuming that the retirement benefit is the only consideration in making the retirement decision, should Ms. Smalley accept her employer's offer?

b. Identify the factors that cause the present value of the retirement benefit to be less than $300,000.

Exercise 24-5A Determining net present value - Payback period and rate of return

Transit Shuttle Inc. is considering investing in two new vans that are expected to generate combined cash inflows of $20,000 per year. The vans' combined purchase price is $65,000. The expected life and salvage value of each are four years and $15,000, respectively. Transit Shuttle has an average cost of capital of 14 percent.

Required

a. Calculate the net present value of the investment opportunity.

b. Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital and whether it should be accepted.

Exercise 24-5B Determining the net present value

Heidi Kahn, manager of the Grand Music Hall, is considering the opportunity to expand the company's concession revenues. Specifically, she is considering whether to install a popcorn machine. Based on market research, she believes that the machine could produce incremental cash inflows of $1,600 per year. The purchase price of the machine is $5,000. It is expected to have a useful life of three years and a $1,000 salvage value. Ms. Kahn has established a desired rate of return of 16 percent.

Required

a. Calculate the net present value of the investment opportunity.

b. Should the company buy the popcorn machine?

Exercise 24-6A Determining net present value

Travis Vintor is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Travis expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows.

Year of Operation Cash Inflow Cash Outflow

2006 $5,400 $3,600

2007 7,800 4,800

2008 8,400 5,040

2009 8,400 5,040

In addition to these cash flows, Mr. Vintor expects to pay $8,400 for the equipment. He also expects to pay $1,440 for a major overhaul and updating of the equipment at the end of the second year of operation. The equipment is expected to have a $600 salvage value and a four-year useful life. Mr. Vintor desires to earn a rate of return of 8 percent.

Required

(Round computations to the nearest whole penny.)

a. Calculate the net present value of the investment opportunity.

b. Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return and whether it should be accepted.

Exercise 24-8A Determining the internal rate of return

Medina Manufacturing Company has an opportunity to purchase some technologically advanced equipment that will reduce the company's cash outflow for operating expenses by $1,280,000 per year. The cost of the equipment is $6,186,530.56. Medina expects it to have a 10-year useful life and a zero salvage value. The company has established an investment opportunity hurdle rate of 15 percent and uses the straight-line method for depreciation.

Required

a. Calculate the internal rate of return of the investment opportunity.

b. Indicate whether the investment opportunity should be accepted.

Exercise 24-6B Determining the net present value

Marcus Carroll has decided to start a small delivery business to help support himself while attending school. Mr. Carroll expects demand for delivery services to grow steadily as customers discover their availability. Annual cash outflows are expected to increase only slightly because many of the business operating costs are fixed. Cash inflows and outflows expected from operating the delivery business follow:

Year of Operation Cash Inflow Cash Outflow

2006 $6,800 $3,200

2007 7,600 3,600

2008 8,400 3,840

2009 9,200 4,000

The used delivery van Mr. Carroll plans to buy is expected to cost $13,200. It has an expected useful life of four years and a salvage value of $2,400. At the end of 2007, Mr. Carroll expects to pay additional costs of approximately $640 for maintenance and new tires. Mr. Carroll's desired rate of return is 12 percent.

Required

(Round computations to the nearest whole penny.)

a. Calculate the net present value of the investment opportunity.

b. Indicate whether the investment opportunity is expected to earn a return above or below the desired rate of return. Should Mr. Carroll start the delivery business?