Question

# Alan is considering the purchase of an \$11,000 commercial printer, scanner, and fax machine for his...

1. 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?

1. 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?
2. 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?
3. Paul bought some gold coins 12 years ago for \$4000. He sold them today for \$3726. What is Paul’s rate of return?
4. What is the net present value of the following cash flow stream @ 6% compounded annually?

Stream A:       0    1          2             3           4               5

1.   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.

1. 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.

1. What is the Net Present Value of the investment?
2. What is the Internal Rate of Return?
3. Should Walker make the investment?
1. 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?

 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.