Question

- Alan is considering the purchase of an $11,000 commercial printer, scanner, and fax machine for his sandwich shop. Alan will need to borrow the funds at 7% interest and the printer is expected to carry a salvage value of $600 in year 4. The expected returns generated by the printer are as follows:

Year 1 $4000

Year 2 $4200

Year 3 $3800

Year 4 $ 1000

What is the net present value?

What is the internal rate of return?

Should Alan make the investment?

- The purchase of a copy machine cost $10,000 and the interest rate to borrow the funds is 6%. The machine is expected to last four years. There is $500 salvage value. The expected cash flows are as follows: year 1=$2500, year 2= $3000, year 3=$4000 and year 4= $3500. What is the net present value?
- Three years ago, Sid purchased a stock for $75. Over the past three years, the stock has paid the following dividends: Year 1= $2.25, Year 2= $2.50, Year 3= $2.75. At the end of the third year, the stock was selling for $85. What was Sid’s compounded internal rate of return?
- Paul bought some gold coins 12 years ago for $4000. He sold them today for $3726. What is Paul’s rate of return?
- What is the net present value of the following cash flow stream @ 6% compounded annually?

Stream A: 0 1 2 3 4 5

- 10 40 70 60 30

6.Your client is 32 years of age. She wants to begin saving for retirement with the first

payment to come the beginning of the year. She can save $6000 per year. She can invest

in the stock market and earn 12% interest. How much money will she have at age 65.

- Walker is considering the purchase an ice cream machine for $11,000. To buy it, he would have borrow the money at 9%. The machine is expected to last four years and carry a salvage value of $250. Walker anticipates the following cash flows:

Year 1= 2600

Year 2= $3100

Year 3= $3900

Year 4= $3400.

- What is the Net Present Value of the investment?
- What is the Internal Rate of Return?
- Should Walker make the investment?

- Robert purchased a new copy machine for his business. The copy machine was

purchased for $10,000 and is expected to generate the following cash flows for the next four years:

Year 1:$3000, Year 2:5000, Year 3: 3600, Year 4: 1500.

Assume the copy machine can be sold for $1800 at the end of year 4. Robert’s required rate of return is 5%. What is the net present value and should the machine be purchased? What is the internal rate of return?

Answer #1

Cost of Debt = borrowing cost = | 7% | |||||

So, It will also be required rate of return for this machine. | ||||||

P.V.F. @7% | Present value | |||||

Cash flow at Year 0 | ||||||

Purchase of machine | -$11,000.00 | 1 | -$11,000.00 | |||

Cash flow at Year 1 | $4,000.00 | 0.934579439 | $3,738.32 | |||

Cash flow at Year 2 | $4,200.00 | 0.873438728 | $3,668.44 | |||

Cash flow at Year 3 | $3,800.00 | 0.816297877 | $3,101.93 | |||

Cash flow at year 4 | $1,600.00 | 0.762895212 | $1,220.63 | |||

($1000 + $600 Salvage value) | ||||||

NPV | $729.32 | |||||

IRR | =IRR(E7:E12,10) | 10.26% | ||||

NPV is positive $729.32. Also IRR 10.26% is greater than required rate of return 7.00%. So Alan should make investment. |
||||||

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