What is the effective annual rate of the given transaction

Assignment Help Financial Accounting
Reference no: EM13954170

Part 1-

Assume all cash flows are after tax.

1. Determine, using both the NPV longhand equation and Excel, the net present value for a project that costs $124,000 and would yield cash flows of $15,000 the 1st year, $18,000 the 2nd year, $22,000 the 3rd year, $25,000 the 4th  year, $29,000 the 5th  year, and $35,000 the 6th  year. Your firm's cost of capital is 8.00%.

2. Determine the net present value for a project that costs $294,105 and is expected to yield cash flows of $28,000 per year for the 1st 5 years, $39,000 per year for the next 5 years, and $49,000 per year for the following 5 years. Your firm's cost of capital is 6.00%.

3. Determine the internal rate of return for a project that costs $46,300 and would yield cash flows of $5,000 the 1st year, $7,000 the 2nd year, $9,000 the 3rd year, $13,000 the 4th year, $14,000 the 5th year, and $18,000 the 6th year.

4. Determine the internal rate of return for a project that costs $180,532 and is expected to yield cash flows of $25,000 per year for the first five years, $33,000 per year for the next five years, and $46,000 per year for the following five years.

5. Your company has an opportunity to invest in a project that is expected to result in cash flows of $18,000 the 1st year, $20,000 the 2nd year, $23,000 the 3rd year, -$8,000 the 4th year, $30,000 the 5th year, $36,000 the 6th year, $39,000 the seventh year, and -$6,000 the eighth year. The project would cost the firm $142,000. If the firm's cost of capital is 12%, what is the modified internal rate of return for the project?

6. Your company has an opportunity to invest in a long-term, slow-growth project that is expected to result in cash flows of $4,000 the 1st year, $6,000 the 2nd year, $7,000 the 3rd year, -$3,000 the 4th year, $25,000 the 5th year, $30,000 the 6th year, and $50,000 the 7th year. The project would cost the firm $61,500. If the firm's cost of capital is 12%, what is the modified internal rate of return for the project?

7. You are considering an investment with the following cash flows. Your required return is 6%, you generally require a payback of 3 years and a discounted payback of 4 years. If your objective is to maximize your wealth, should you take this investment?

Year

0

1

2

3

4

5

Cash Flow

-$50,000

$20,000

$20,000

$20,000

$20,000

-$30,000

8. Determine the payback period (in years) for a project that costs $150,000 and would yield cash flows of $30,000 the 1st  year, $60,000 the 2nd year, $15,000 the 3rd year, $40,000 the 4th year, $25,000 the 5th year, and $33,000 the 6th year.

Part 2-

9. You are an executive within the Investor Relations team for a firm (you are primarily concerned with maximizing shareholder wealth), and a project is up for discussion. You must vote whether to make the investment, with only cash flow and NPV data. In which of the following situations should the investment be accepted, rejected, or neither (not enough information to determine), in your opinion?

a. The NPV of the investment is exactly equal to zero

b. The NPV of the investment is positive

c. The NPV of the investment is negative

d. The sum of the cash inflows flows of the investment is greater than the sum of the cash outflows, regardless of when the cash flows occur

e. The project under consideration has unconventional cash flows

10. You are a startup company, and you are considering a new project with an initial investment and positive future cash flows. You feel that your discount rate will be 8% based in your current credit situation, but there is a possibility that it will be higher. How would the increase in the discount rate affect the internal rate of return and NPV of the project?

11. A capital project costs $300M and has expected cash flows of $75M for the 1st three years and $50M in each of the project's last three years. If the discount rate is 8%, what is the discounted payback period?

12. You own some manufacturing equipment that must be replaced. Two different suppliers present a purchase and installation plan for your consideration, Supplier A and Supplier B. Project A costs $500K and has cash flows of $400K in each of the next 2 years. Project B also costs $500K, and generates cash flows of $500K and $275K for the next 2 years, respectively. Supplier B says you should select their project because you can achieve a return on your investment in just 1 year.

a. What is the crossover rate?

b. What is the NPV at the cross-over rate?

c. Which project should be selected (and why) if the actual cost of capital is:

-  Equal to the crossover rate?

-  Less than the crossover rate?

-  Greater than the crossover rate?

13. You are going to choose between two investments. Both cost $50,000, but investment A pays $25,000 a year for 3 years while investment B pays $20,000 a year for 4 years. If your required return is 12%, which should you choose?

14. You have a choice between 2 mutually exclusive investments. If you require a 15% return, which investment should you choose?

 

A

B

Year

Cash flow

Cash Flow

0

-$100,000

-$125,000

1

$20,000

$75,000

2

$40,000

$45,000

3

$80,000

$40,000

15. Your car died and you need to borrow $13,000 quickly to buy a used car to get to work. It's Saturday afternoon and the bank just closed, but you can get a signature loan from a local pawn shop if you promise to repay them $1200 every month over the next year.

a. From the pawn shop's point of view, what is the IRR of this transaction?

b. What is the EAR (Effective Annual Rate) of this transaction?

c. Suppose that the pawn shop's cost of funds is 5%, compounded monthly. From their point of view, what is the NPV of this deal?

16. Bill plans to open a service center. The equipment will cost $75,000. Bill expects the after-tax cash inflows to be $20,000 annually for 8 years, after which he plans to scrap the equipment and retire.

a. What is the project's regular payback period?

b. Assume the required return is 10%. What is the project's discounted payback period?

c. Assume the required return is 10%. What is the project's NPV?

d. Assume the required return is 20%. What is the project's IRR? Should it be accepted?

Part 3-

17. You have an opportunity to invest in a new startup franchised business. The investment fee is $50,000 for the franchise fee, plus another $130,000 in equipment costs, and $90,000 for operational expenses. You expect the monthly operational costs to total 50% of gross revenues; additionally, interest, taxes, depreciation, and amortization will cost you approximately 40% of the remaining amount. If each item is sold for $600, and the cost of capital is 8%, how many items need to be sold each year (assume a constant rate) in the first 3 years year in order to:

a. Break even?

b. Earn $67,500 profit (future value)?

c. What is the NPV of b?

d. At the rate of production found in part a, how many years before the NPV is greater than the initial investment amount?

e. If the rate of production increases by 20% year over year (after year 1) in part d, how many years before the NPV is greater than the initial investment amount?

18. You are considering the purchase of a Pub. The asking price is $250,000, of which and $172,000 is for the property and equipment. The pro forma that the current owners projected for the next 5 years is shown below. If the future discount rate could vary between 1.75% and 5%, at what rates would this be a good deal? (calculate the rate at .25% increments; ignore depreciation)

 

2015

2016

2017

2018

2019

 

 

 

 

 

 

 

Gross Sales

Cash Sales - Food

$ 108,719

$ 86,975

$ 86,975

$ 86,975

$ 108,719

 

Cash Sales - Beverages

112,856

124142

108003

112323

110077

 

Cash Sales - Misc.

44,315

48747

48113

57735

63509

 

Total Cash Available

$ 265,890

$ 259,863

$  243,091

$  257,034

$  282,305

Expenses

 

 

 

 

 

 

Variable Expenses

 

 

 

 

 

COGS - Beverage

28214

31318

26307

27359

26812

COGS - Food

35877

43052

42493

50991

56090

Hourly  Wages & Benefits

29758

37198

28476

39670

42012

Total Variable Expenses

$   93,849

$ 111,568

$     97,275

$  118,020

$  124,914

Fixed Expenses

 

 

 

 

 

Direct Operating Expenses

 

 

 

 

 

Management Salaries

26,731

21385

21385

21385

26,731

China, Silver, Glassware

264

212

212

212

264

Equipment Rental

2404

1923

1923

1923

2,404

Licenses & Permits

481

385

385

385

481

Linenes/Uniforms

721

577

577

577

721

Janitorial

4327

3462

3462

3462

4,327

Supplies

2476

1981

1981

1981

2,476

Misc. Direct  Operating Expenses

962

769

769

769

962

Total Direct Operating Expenses

38,366

$   30,694

$     30,694

$     30,694

$     38,366

General and Admin Expenses

 

 

 

 

 

Music and Entertainment

7212

5769

5769

5769

7212

Advertising and Promotion

19231

15385

15385

15385

19231

Credit Card Commission

1329

1064

1064

1064

1329

Professional Fees

2163

1731

1731

1731

2163

Insurance

4087

3269

3269

3269

4087

Excise Taxes

18612

14890

14890

14890

18612

Misc.

2404

1923

1923

1923

2404

Total General and Admin Expenses

55038

44031

44031

44031

55038

Rent

20833

20833

20833

20833

20833

Repairs and Maintenance

625

625

625

625

625

Utilities

5000

5000

5000

5000

5000

Long-Term Loan Repayment

20758

20758

20758

20758

20758

Management   Fee

5318

4254

4254

4254

5318

Total Fixed Expenses

$ 145,938

$ 126,195

$  126,195

$  126,195

$  145,938

Taxes

1432

1432

1432

1432

1432

Total Cash Paid Out

$ 241,219

$ 239,195

$  224,902

$  245,647

$  272,284

Cash Flow

$   24,671

$   20,668

$     18,189

$     11,386

$     10,021

19. Your company is considering whether to insource or to purchase a part for your product. In order to produce the part yourself, you will need to purchase the raw materials for a cost of $800 per part. It takes 6 months to create 90 parts. The total cost to produce one part is $870.15, including labor. The cost to purchase one part is $915.67, and you have 60 days to pay the invoice upon receipt of the parts. What would you recommend the company do if the annual discount rate is 8%? What if it were 12%? (Assume 30 days/month.)

Reference no: EM13954170

Questions Cloud

Use the ethical decision-making process : Supermodel Kate Moss appeared in photos in a number of tabloid magazines and elsewhere using illegal drugs. Subsequent to the appearance of the photographs, several of her clients, including Chanel, H&M, and Burberry, cancelled their contracts (some ..
Revenue recognition-matching principle : Explain whether a company must have an inflow of an asset to be able to recognize revenue. Also, give two examples of situations in which revenue is earned continuously over a period of time.
Review physical and chemical properties of water : What are roles of osmotic potential or turgor pressure in regulating water potential of plant cells? Explain your answer. Do plant cells have a negative turgor pressure? Why or why not?
Several ways whether the social responsibility : This chapter has asked in several ways whether the social responsibility of the companies you patronize has ever made any difference to your purchasing decisions. Will it make any difference in the future as a result of what you have learned? Do your..
What is the effective annual rate of the given transaction : What is the EAR (Effective Annual Rate) of this transaction? Suppose that the pawn shop's cost of funds is 5%, compounded monthly. From their point of view, what is the NPV of this deal?
Incentives offered through the hitech legislation : In order for organizations to receive the incentives offered through the HITECH legislation, they must be able to demonstrate that they are using the technology in meaningful ways. The following criteria for meaningful use must be evident to quali..
Accrual basis of accounting : For the following situations, indicate the date on which revenue would be recognized, assuming the accrual basis of accounting.
Consider normally distributed process-process center : Consider a normally distributed process that cuts wood with a “process center” of 18 inches and a standard deviation of 0.08 inches. The lower specification limit is 17.75 inches, and the upper specification limit is 18.18 inches.
How are radioactive isotopes produced : When radium 226 decays emitting an alpha particle, what is the atomic number and atomic mass of the resulting nuclei?

Reviews

Write a Review

 

Financial Accounting Questions & Answers

  Predecessor auditor prior to accepting the engagement

What information should Tish & Field obtain during its inquiry of the predecessor auditor prior to accepting the engagement? What additional audit procedures should Tish & Field perform in evaluating Rebel as a potential client?

  Compute the companys predetermined overhead rate

Compute the company's predetermined overhead rate for the year and record the above transactions in journal entries.

  General fund general journal to record the issuance

During Fiscal year 2014, the City of Hickory Hills issued purchase orders to various vendors in the amounts shown for the following functions of the city: Prepare a summary journal entry in the General Fund general journal to record the issuance of p..

  Preparation of journal and posting the transactions to

preparation of journal and posting the transactions to ledgers.the trial balance of stephanie stouse registered

  How much would you have at the end of that time

how much would you have at the end of that time, assuming that your account earns 5% interest compounded daily? Assume also that you drink a cup of coffee every day, including weekends.

  Compute the incremental profit from accepting special order

Mohave Corp. makes several varieties of beach umbrellas and accessories. It has been approached by a company called Lost Mine Industries about producing a special order for a custom umbrella called the Ultimate Shade (US). Compute the incremental pro..

  Michelles flowering plants provides the subsequent

michelles flowering plants provides the subsequent information for the month of mayactual budgettulips geraniums tulips

  Questionthe most current monthly contribution format income

questionthe most current monthly contribution format income statement for reston company is provided belowincome

  Assuming that this partnership uses the goodwill method

Assuming that this partnership uses the bonus method exclusively, make all necessary journal entries. Entries for the monthly drawings of the partners are not required.

  Determine the sampling distribution for the sample mean

Determine the sampling distribution for the sample mean, X' and calculate the mean and the standard deviation for X' and Determine whether X' is an unbiased estimator for μ.

  Normal balance per the general ledger

Cash received from a customer on account was debited for $570, and Accounts Receivable was credited for the same amount. The actual collection was for $750.

  Identify the type of account as an asset

For each of the following (1) identify the type of account as an asset, liability, equity, revenue, or expense, (2) enter debit (Dr.) or credit (Cr.) to identify the kind of entry that would increase the account balance, and (3) identify the norma..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd