3.John has just won the Flyball Lottery. He has two options for receiving his prize. The first option is to accept a $135,000 cash payment today. The second option is to receive $17,700 at the end of

3.John has just won the Flyball Lottery. He has two options for receiving his prize. The first option is to accept a $135,000 cash payment today. The second option is to receive $17,700 at the end of each of the next 19 years and a $37,900 lump sum payment in the 20th year. John can invest money at a 10% rate.

(a) Calculate the present value of the two options. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)

(b) If John could invest money at 13%, calculate the present value of the two options. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)

4.Flounder’s Lawn Service needs to purchase a new lawnmower costing $8,416 to replace an old lawnmower that cannot be repaired. The new lawnmower is expected to have a useful life of 6 years, with no salvage value at the end of that period.

(a)If Flounder’s required rate of return is 11%, what level of annual cash savings must the lawnmower generate to be considered an acceptable investment under the net present value method? (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)

Annual cash savings should be?

(b)If Flounder’s required rate of return is 18%, what level of annual cash savings must the lawnmower generate to be considered an acceptable investment under the net present value method? (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)

Annual cash savings should be?

5.The Bramble Company is planning to purchase $487,000 of equipment with an estimated 7-year life and no estimated salvage value. The company has projected the following annual cash flows for the investment:

YearProjected       Cash Flows

1                               $207,000

2                                 132,000

3                               109,000

4                              51,700

5                             61,200

6                             44,400

7                            46,300

Total                       $651,600

Calculate the net present value of the proposed equipment purchase. Bramble uses a 6% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)

Net present value?

11.William Brown is evaluating two new business opportunities. Each of the opportunities shown below has a 15-year life. William uses a 12% discount rate.

Option 1                 Option 2

Equipment purchase and installation   $71,200                   $82,800

Annual cash flow                                     $29,000                    $31,130

Equipment overhaul in year 6                 $4,710                          –

Equipment overhaul in year 8                      –                              $5,730

(a) Calculate the net present value of the two opportunities. (Round present value factor calculations to 4 decimal places, e.g. 1.2514 and the final answers to 0 decimal places, e.g. 59,991.)

Option 1                     Option 2

Net present value

(b) Calculate the profitability index of the two opportunities. (Round answers to 2 decimal places, e.g. 15.25.)

Option 1                Option 2

Profitability Index

12.Flint Pix currently uses a six-year-old molding machine to manufacture silver picture frames. The company paid $95,000 for the machine, which was state of the art at the time of purchase. Although the machine will likely last another ten years, it will need a $12,000 overhaul in four years. More important, it does not provide enough capacity to meet customer demand. The company currently produces and sells 9,000 frames per year, generating a total contribution margin of $92,500.Martson Molders currently sells a molding machine that will allow Flint Pix to increase production and sales to 12,000 frames per year. The machine, which has a ten-year life, sells for $138,000 and would cost $14,000 per year to operate. Flint Pix’s current machine costs only $8,000 per year to operate. If Flint Pix purchases the new machine, the old machine could be sold at its book value of $5,000. The new machine is expected to have a salvage value of $20,200 at the end of its ten-year life. Flint Pix uses straight-line depreciation.

(a)Calculate the new machine’s net present value assuming a 14% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)Net present value$______?_______

(b)Use Excel or a similar spreadsheet application to calculate the new machine’s internal rate of return. (Round answer to 2 decimal places, e.g. 1.25%.)

Internal rate of return ______?___%

(c)Calculate the new machine’s payback period. (Round answer to 2 decimal places, e.g. 1.25.)

Payback period___?___years