This is an Annuity question. You have purchased a car for $42,600 and taken a lo

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This is an Annuity question. You have purchased a car for $42,600 and taken a loan that is to be repaid in 60 equal payments beginning next month. The interest rate charged is 0.58% monthly. What are your monthly payments?

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Question 6 (1 point)

As the manager of the pension fund, you are frequently targeted by software companies peddling investment simulation software. You have finally narrowed down your choice to two applications. You need to analyze the options by calculating NPV, IRR and Payback Periodbased on their purchase price and savings to your company over time. Your staff has prepared a cash-flow table to help you. Year zero shows the purchase price of each application, and the figures listed for years 1-3 represent the savings to the company in successive years.

You are trying to decide which Application to use and will choose the Application that has a larger NPV. Calculate the NPV of both Applications if the required rate of return is 8.14 percent. Now as your answer, write the NPV for the chosen Application.

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Question 7 (1 point)

Your CEO has asked you to evaluate whether the firm should launch a new product. Information provided by the consultant is as follows:

$20,000 has been spent on doing a market survey, and this cost has been incurred regardless of whether the project is done or not.

initial investment: $120,000 composed of $50,000 for the plant and $70,000 net working capital (NWC)

Profits of $35,000 every year for 3 years after which the project ends and NWC is recovered. No salvage value for the plant

For a discount rate of 10%, what is the NPV?

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Question 8 (1 point)

You are analyzing the prospects of installing cost saving machinery. You have the following information:

The machinery will cost $64,000 and will be depreciated straight line (equal amounts) over 4 years.

The machinery will save $34,000 a year.

The machinery will occupy space that would otherwise have been rented for $10,000 a year (before taxes deducted).

The tax rate is 40%.

(Hint: First calculate the net increase in income to be taxed taking into account savings, depreciation and opportunity cost of rentable space)

What will be the increase in taxes per year from installing the machinery? (Your answer should be a positive number.)

Explanation / Answer

Question 5 :

Answer : $ 842.73

This is an ordinary annuity.

PVIFA 0.58 %, n=60 = 50.5502

Present value of an annuity = Annuity x PVIFA

Annuity = $ 42,600 / 50.5502 = $ 842.73

Question 6 :

Answer: $ 840,128.50

Application I :

Payback period = 1 + $ 100,000 / $ 700,000 = 1.14 years.

IRR = 84 %

NPV = $ 400,000 x 0.92473 + $ 700,000 x 0.85512 + $ 470,000 x 0.79075 - $ 500,000 = $ 369,892 + $ 598,584 + $ 371,652.50 - $ 500,000 = $ 840,128.50

Application II :

Payback period = 1 + $ 300,000 / $ 740,000 = 1.41 years.

IRR = 54%

NPV = $ 500,000 x 0.92473 + $ 740,000 x 0.85512 + $ 600,000 x 0.79075 - $ 800,000 = $ 462,365 + $ 632,788.80 + $ 474,450 - $ 800,000 = $ 769,603.80

Question 7 :

Answer : $ 19,632.50

NPV = $ 35,000 x PVA10%, 3 years + $ 70,000 x PV10%, 3 years - $ 120,000 = $ 35,000 x 2.4869 + $ 70,000 x 0.7513 - $ 120,000 = $ 87,041.50 + $ 52,591 - $ 120,000 = $ 19,632.50

Question 8 :

Answer: $ 3,200

Annual depreciation = $ 64,000 / 4 = $ 16,000.

Annual savings = $ 34,000.

Opportunity cost per year : $ 10,000.

Incremental income before taxes = Annual savings - Annual depreciation - Opportunity cost = $ ( 34,000 - 16,000 - 10,000) = $ 8,000.

Taxes on incremental income = $ 8,000 x 40% = $ 3,200.

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