Chapter 26: Q21RQ (page 1464)
Why are net present value and internal rate of return considered discounted cash flow methods?
NPV and IRR are called the discounted cash flow method as they are based on the time value of money and discount the future cash flow to the present value.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Your grandfather would like to share some of his fortune with you. He offers to give you money under one of the following scenarios (you get to choose):
1. \(7,250 per year at the end of each of the next eight years
2. \)49,650 (lump sum) now
3. $98,650 (lump sum) eight years from now
Requirements
1. Calculate the present value of each scenario using an 8% discount rate. Which scenario yields the highest present value? Round to nearest whole dollar.
2. Would your preference change if you used a 10% discount rate?
Henderson Manufacturing, Inc. has a manufacturing machine that needs attention. The company is considering two options. Option 1 is to refurbish the current machineat a cost of \(1,200,000. If refurbished, Henderson expects the machine to last anothereight years and then have no residual value. Option 2 is to replace the machine at acost of \)4,600,000. A new machine would last 10 years and have no residual value.Henderson expects the following net cash inflows from the two options:
YearRefurbish CurrentPurchase New
MachineMachine
1 \( 350,000 \) 3,780,000
2 340,000 510,000
3 270,000 440,000
4 200,000 370,000
5 130,000 300,000
6 130,000 300,000
7 130,000 300,000
8 130,000 300,000
9 300,000
10 300,000
Total \( 1,680,000 \) 6,900,000
Henderson uses straight-line depreciation and requires an annual return of 10%.
Requirements
1. Compute the payback, the ARR, the NPV, and the profitability index of these twooptions.
2. Which option should Henderson choose? Why?
Question: What is an annuity? How does it differ from a lump sum payment?
Henry Co. is considering acquiring a manufacturing plant. The purchase price is \(1,200,000. The owners believe the plant will generate net cash inflows of \)325,000 annually. It will have to be replaced in six years. Use the payback method to determine whether Henry should purchase this plant. Round to one decimal place.
Using the payback method to make capital investment decisions
Refer to the Hunter Valley Snow Park Lodge expansion project in Short Exercise S26-4. Compute the payback for the expansion project. Round to one decimal place.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
