Mr. Jackson has been awarded a bonus for his outstanding work. His employer offe

Question

Mr. Jackson has been awarded a bonus for his outstanding work. His employer offers him a choice of a lump-sum of $5,000 today, or an annuity of $1,250 a year for the next five years. Which option should Mr. Jackson choose if his opportunity cost is 9 percent Kingston Corp. is considering a new machine that requires an initial investment of $48,000 installed, and has a useful life of 8 years. The expected annual after-tax cash flows for the machine are $89,000 for each of the 8 years and nothing thereafter. Calculate the net present value of the machine if the required rate of return is 11 percent. Should Kingston accept the project (assume that it is independent and not subject to any capital rationing constraint) Explain your answer. Consider two mutually exclusive projects X and Y with identical initial outlays of $600,000 and useful lives of 5 years. Project X is expected to produce an after-tax cash flow of $180,000 each year. Project Y is expected to generate a single after-tax net cash flow of $1,015,000 in year 5. The discount rate is 14 percent. Calculate the net present value for each project. What decision should you make regarding these projects

Explanation / Answer

1. The two options are a lumpsum amount of 5000 today or 1250 per year for next 5 years. Assume that the lumpsum amount is invested @ 9% for 5 years

Option 1 ; Lumpsum amount

Present Value of 7693.12 at year 5 = 7693.12 * .6411 = 5000

Option 2: Payment of 1250 for 5 years

First Option of Lumpsum amount is feasible

2. Initial Investment = 480000

Cash flow for 8 years = 89000 per year

Cumulative PV of 11% for 8 years = 5.1461

PV of future cash flows = 89000*5.1461 = $458005

NPV = 458005-480000 = -21995

Since the NPV is negative, the project should not be accepted.

3.

Project X is best choice since the npv IS POSITIVE.

Year Investment Interest @ 9% Balance 1 5000 450 5450 2 5450 490.5 5940.5 3 5940.5 534.645 6475.145 4 6475.145 582.76305 7057.90805 5 7057.90805 635.2117245 7693.119775

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.