Question

1.) Pizzeria Company earns 9% on an investment that will return $600,000, 8 years from now. What is the, amount Pizzeria should invest now to earn this rate of return?

2.) Taco Company receives a $50,000, 6-year note bearing interest of 8% (paid annually) from a customer at a time when the discount rate is 9%. What is the present value of the note received by Taco?

3.) Ramos Company is considering purchasing equipment. The equipment will produce the cash flows:

Year 1, $30,000; Year 2, $40,000; Year 3, $50,000. Ramos requires a minimum rate of return of 12%. What is the maximum price Ramos should pay for this equipment?

Answer 1

Part 1)

Amount invested = Future Value / (1+i)^n

= 600000/(1+9%)^8

= 6000008/1.992563

= $301120

So the correct answer is $ 301120

Part 2)

Present value of note payable = (interest payment * present value annuity (6,9%)) + (fave value * present value annuity factor (6,9%))

= ((50000*8%)*4.485919) + (50000*.596267)

= 17943.6729813.37

= $ 47757.04

The correct answer is $ 47757.04

Part 3)

MAximum Price = Present value of inflows

= inflows * present value factor

= (30000*(1/(1.12)^1))+(40000*(1/(1.12)^2))+(50000*(1/(1.12)^3))

= 26785.71+31887.76+35589.01

= $94262.48

Thus the correct answer is $ 94262.48