Exercise 1:
1. Basic present value calculations
Calculate the present value of the following cash flows, rounding to the nearest dollar:
A single cash inflow of $12,000 in five years, discounted at a 12% rate of return.
An annual receipt of $16,000 over the next 12 years, discounted at a 14% rate of return.
A single receipt of $15,000 at the end of Year 1 followed by a single receipt of $10,000 at the end of Year 3. The company has a 10% rate of return.
An annual receipt of $8,000 for three years followed by a single receipt of $10,000 at the end of Year 4. The company has a 16% rate of return.
Chapter 8 Exercise 4:
4. Cash flow calculations and net present value
On January 2, 20X1, Bruce Greene invested $10,000 in the stock market and purchased 500 shares of Heartland Development, Inc. Heartland paid cash dividends of $2.60 per share in 20X1 and 20X2; the dividend was raised to $3.10 per share in 20X3. On December 31, 20X3, Greene sold his holdings and generated proceeds of $13,000. Greene uses the net-present- value method and desires a 16% return on investments.
Prepare a chronological list of the investment’s cash flows. Note: Greene is entitled to the 20X3 dividend.
Compute the investment’s net present value, rounding calculations to the nearest dollar.
Given the results of part (b), should Greene have acquired the Heartland stock? Briefly explain.
Chapter 8 exercise 5:
5. Straightforward net present value and internal rate of return
The City of Bedford is studying a 600-acre site on Route 356 for a new landfill. The startup cost has been calculated as follows:
Purchase cost: $450 per acre
Site preparation: $175,000
The site can be used for 20 years before it reaches capacity. Bedford, which shares a facility in Bath Township with other municipalities, estimates that the new location will save $40,000 in annual operating costs.
Should the landfill be acquired if Bedford desires an 8% return on its investment? Use the…