exercises 1 refer to the data in the following table setting initial outlay life yea 4313311

exercises 1 refer to the data in the following table setting initial outlay life yea 4313311

Exercises

1.Refer to the data in the following table:

Setting

Initial Outlay

Life (years)

Discount Rate

(compounded

annually)

Future Value

(at the end of life)

1

$225,000

5

10%

?

2

?

10

12%

$400,000

3

$157,950

8

?

$450,000

4

$150,000

?

12%

$371,400

Required:

Treating each row of the table independently, compute the missing information. Use the present value/future value tables at the end of the book.

2.Kim Barth decides to start a small restaurant near a busy shopping mall. She applies for a loan of $150,000, to be repaid in five annual installments, with each installment due at the end of each of the next five years. The bank charges an interest rate of 10%, compounded annually.

Required:

Compute the annual installment amount. Use the annuity tables at the end of

the book.

3.Quality Metal Works, Inc. is considering a proposal to buy a new furnace for $2,500,000 (all costs included). The furnace will have a useful life of 10 years, with no expected salvage value at the end of its life. The firm requires a rate of return of 8% on all its investments. For convenience, assume that cash flows occur at the end of each year. Assume straight-line depreciation for tax purposes. The applicable tax rate is 30%.

Required:

a. Ignore the depreciation tax shield. What are the minimum annual cash inflows that this furnace must generate for the company to justify the investment?

b. How much is the annual depreciation tax shield? What is the present value of the depreciation tax shield?

c. If you take into account the depreciation tax shield, will the minimum annual cash inflows from operations (pretax) needed to justify this investment increase or decrease?  By how much?

4.Pringle Plastics recently sold a forklift for $12,500. The firm, which pays taxes on income at the rate of 45%, had purchased the forklift for $50,000. The firm’s books show accumulated depreciation of $38,700.

Required:

What is the after-tax cash flow due to the sale of the forklift?

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