APPENDIX C: PROBLEM MATERIAL ESSAY. Write your answer in the space provided or on a separate sheet of paper. 1) Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Terms: a. Annuity b. Future value of a single amount c. Discount rate d. Future value of an annuity e. Interest f. Compound interest g. Present value of a single amount h. Time value of money i. Simple interest j. Present value of an annuity Phrases: _____ A dollar now is worth more than a dollar later. _____ Cash payments of equal amounts over time periods of equal length. _____ Accumulation of a series of equal payments. _____ Interest earned on the initial investment and on previous interest. _____ Accumulation of an amount with interest.
Version 1
1
2) Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Terms: a. Annuity b. Future value of a single amount c. Discount rate d. Future value of an annuity e. Interest f. Compound interest g. Present value of a single amount h. Simple interest i. Present value of an annuity Phrases: _____ Amount today equivalent to a specified future amount. _____ The rate at which future dollars are equal to current dollars. _____ Interest earned on the initial investment only. _____ The factor that causes money today to be worth more than the same amount in the future. _____ Current worth of a series of equal payments received in the future.
3) Compute the future value of the following invested amounts at the specified periods and interest rates: Item a. b. c.
Version 1
Invested Amount $27,000 $37,000 $17,000
Interest Rate 9% 6% 11%
Number of Periods 11 5 16
2
4) Compute the future value of the following invested amounts at the specified periods and interest rates: Item a. b. c.
Invested Amount $20,000 $30,000 $10,000
Interest Rate 8% 4% 12%
Number of Periods 10 8 15
5) Anthony would like to have $18,000 to buy a new car in three years. Currently, he has saved $15,000. If he puts $15,000 in an account that earns 6% interest, compounded annually, will he be able to buy the car in three years?
6) Michaela would like to have $10,000 for a European vacation in four years. Currently, she has saved $8,000. If she puts $8,000 in an account that earns 6% interest, compounded annually, will she be able to take the vacation in four years?
Version 1
3
7) Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rates: Item a. b. c.
Invested Amount $34,000 $13,000 $50,000
Interest Rate 7% 4% 11%
Number of Periods 17 25 11
8) Compute the present value of the following single amounts to be received at the end of the specified periods at the given interest rates: Item a. b. c.
Invested Amount $40,000 $20,000 $50,000
Interest Rate 7% 6% 11%
Number of Periods 20 25 10
9) Compute the present value of the following single amounts to be received at the end of the specified periods at the given interest rates: Item
Version 1
Invested
Interest Rate
Number of 4
a. b. c. d.
Amount $1,900 $1,900 $1,900 $1,900
8% 8% 8% 8%
Periods 1 2 3 4
10) Compute the present value of the following single amounts to be received at the end of the specified periods at the given interest rates: Item a. b. c. d.
Invested Amount $1,500 $1,500 $1,500 $1,500
Interest Rate 10% 10% 10% 10%
Number of Periods 1 2 3 4
11) If you had an investment opportunity that promises to pay you $26,000 in six 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?
Version 1
5
12) 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?
13) Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after-tax cash savings of $9,000 the first year, $18,000 for the next two years, and $20,000 for the next two years. Assuming a 11% discount rate, calculate the total present value of the cash flows.
14) 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.
15) Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in after-tax cash savings of $6,000 the first year, $21,000 for the next two years, and $24,000 for the next two years. Assuming a 10% discount rate, calculate the total present value of the cash flows.
Version 1
6
16) Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in after-tax cash savings of $9,000 the first year, $15,000 for the next two years, and $18,000 for the next two years. Assuming a 12% discount rate, calculate the total present value of the cash flows.
17) Hillsdale is considering two options for comparable computer software. Option A will cost $35,000 plus annual license renewals of $1,200 for three years, which includes technical support. Option B will cost $19,000 with technical support being an add-on charge. The estimated cost of technical support is $4,300 the first year, $3,300 the second year, and $2,300 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 6%. Ignore income taxes. Determine which option should be chosen based on present value considerations.
18) 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.
Version 1
7
19) DON Corporation is contemplating the purchase of a machine that will produce net aftertax cash savings of $29,000 per year for 4 years. At the end of four years, the machine can be sold to realize after-tax cash flows of $5,300. Assuming a 10% discount rate, calculate the total present value of the annual cash savings and the salvage value of the machine.
20) DON Corporation is contemplating the purchase of a machine that will produce net aftertax 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 annual cash savings and the salvage value of the machine.
21) Baird Bros. Construction is considering the purchase of a machine at a cost of $122,000. The machine is expected to generate cash flows of $20,000 per year for twelve years and can be sold at the end of twelve years for $10,500. The discount rate is 8%. 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.
Version 1
8
22) 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.
23) Dobson Contractors is considering buying equipment at a cost of $80,000. The equipment is expected to generate cash flows of $15,100 per year for eight years and can be sold at the end of eight years for $6,000. The discount rate is 10%. 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.
24) 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.
Version 1
9
25) Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $89,000 per year for 5 years. Assuming a 7% discount rate, calculate the present value of the cash savings.
26) 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.
27) Samson Incorporated is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $130,000 per year for 7 years. Assuming a 7% discount rate, calculate the present value of the cash savings.
Version 1
10