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Chapter 26: Q3TI (page 1444)

Calculate the present value of the following future cash flows, rounding all calculations to the nearest dollar.

11. \(5,000 received in three years with interest of 10%

12. \)5,000 received in each of the following three years with interest of 10%

13. Payments of \(2,000, \)3,000, and $4,000 received in years 1, 2, and 3, respectively, with interest of 7%

Short Answer

Expert verified

11. Present value of $5,000 received in three years with interest of 10% is $3,755.

12. Present value of $5,000 received in each of the following three years with interest of 10% is $4,545, $4,130, and $3,755.

13. Present value of $2,000, $3,000, and $4,000 received in years 1, 2, and 3, respectively, with interest of 7% is $1,870, $2,619, and $3,264.

Step by step solution

01

11.Computing present value-

Presentvalue=Amountofeachcashinflow×PVfactori=$5,000×0.751=$3,755

02

12.Computing present value-

Amount

x

PV factor for i

=

Present value

$5,000

X

0.909

=

$4,545

$5,000

X

0.826

=

$4,130

$5,000

x

0.751

=

$3,755

$12,430

03

13. Computing present value-

Amount

x

PV factor for i

=

Present value

$2,000

X

0.935

=

$1,870

$3,000

X

0.873

=

$2,619

$4,000

x

0.816

=

$3,264

$7,753

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Most popular questions from this chapter

Question: What is an annuity? How does it differ from a lump sum payment?

What is capital rationing?

Spencer Wilkes is the marketing manager at Darby Company. Last year, Spencer recommended the company approve a capital investment project for the addition of a new product line. Spencer’s recommendation included predicted cash inflows for five years from the sales of the new product line. Darby Company has been selling the new products for almost one year. The company has a policy of conducting annual post audits on capital investments, and Spencer is concerned about the one-year post-audit because sales in the first year have been lower than he estimated. However, sales have been increasing for the last couple of months, and Spencer expects that by the end of the second year, actual sales will exceed his estimates for the first two years combined.

Spencer wants to shift some sales from the second year of the project into the first year. Doing so will make it appear that his cash flow predictions were accurate. With accurate estimates, he will be able to avoid a poor performance evaluation. Spencer has discussed his plan with a couple of key sales representatives, urging them to report sales in the current month that will not be shipped until a later month. Spencer has justified this course of action by explaining that there will be no effect on the annual financial statements because the project year does not coincide with the fiscal year––by the time the accounting year ends, the sales will have actually occurred.

Requirements

1. What is the fundamental ethical issue? Who are the affected parties?

2. If you were a sales representative at Darby Company, how would you respond to Spencer’s request? Why?

3. If you were Spencer’s manager and you discovered his plan, how would you respond?

4. Are there other courses of action Spencer could take?

S26-6 Using the ARR method to make capital investment decisions Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26-4. Calculate the ARR. Round to two decimal places.

Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26-4 and your calculations in Short Exercises S26-5 and S26-6. Assume the expansion has zero residual value.

Requirements

1. Will the payback change? Explain your answer. Recalculate the payback if it changes. Round to one decimal place.

2. Will the project’s ARR change? Explain your answer. Recalculate ARR if it changes. Round to two decimal places.

3. Assume Hunter Valley screens its potential capital investments using the following decision criteria:

Maximum payback period

5.0 years

Maximum accounting rate of return

18.00%
See all solutions

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