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 $480,000 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

Answer:1 PVA = $1,250(PVIFA) = 1,250(3.890) = $4,862.50

Mr. Jackson should choose a lump- sum of $5,000 today.

Answer:2

b. No, the projects NPV is negative and the IRR is less than the required rate of return. Acceptance of this project would reduce shareholder value.

Answer:3 a

b Both the Project should be accepted because NPV is positive.

Discount rate 11% Particulars Year Cash flows Intial investment 0 -480000 After tax cash flow 1 89000 2 89000 3 89000 4 89000 5 89000 6 89000 7 89000 8 89000 NPV -21995.07428

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