1 BT is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its six-year useful year….

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Q.1

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B&T is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its six-year useful year. The machine costs $83,150 and has no salvage value. It has a 20% internal rate of return. (Ignore income tax in this problem)

What is the annual cost savings promised by the machine?

Q.2

Consider each of the situation independently

Annual cash inflows from 2 competing investment opportunities are given below. Each investment opportunity requires the same initial investment.

2.1 Compute the present value of the cash inflows for each investment using a 20% discount rate.

2.2 At the end of 3 years, when graduate from college, father has promised to give you a used car that will cost $22,000. What lump sum must he invest now to have the $22,000 at the end of 3 years if he can invest money at (a) 5% and (b) 8%?

2.3 Sam has just won the grand prize on the Wheel & Deal quiz show. He has a choice between (a) receiving $400,000 immediately, and (b) receiving $60,000 per year for 8 years plus a lump sum of $150,000 at the end of the 8-year-period. If he can get a return of 10% on his investments, which option should he accept? (Use present value analysis to show all computations)

2.4 You are a beneficiary in the will of your late Aunt Susan. The executrix of her estate has given you 3 options as to how you may receive your inheritance:

(a) Receiving $50,000 immediately

(b) Receiving $80,000 at the end of 6 years

(c) Receiving $12,000 at the end of each year for 6 years (total: $72,000)

If you can invest money at a 12% return, which option would you prefer?

Thanks!

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