1.Gomez Corporation is considering two alternative investment proposals with the following data:
Proposal X Proposal Y
Investment $850,000 $468,000
Useful life 8 years 8 years
Estimated annual net $125,000 $78,000
cash inflows for 8 years
Residual value $40,000 $ -
Depreciation method Straight-line Straight-line
Required rate of return 14% 10%
1a. How long is the payback period for Proposal X?
1b. What is the accounting rate of return for Proposal Y?
2. You have been awarded a scholarship that will pay you $500 per semester at the end of each of the next 8 semesters that you earn a GPA of 3.5 or better. You are a very serious student and you anticipate receiving the scholarship every semester. Using a discount rate of 3% per semester, which of the following is the correct calculation for determining the present value of the scholarship? PLEASE STATE WHY YOU CHOSE THE ANSWER THAT YOU DID.
A) PV = $500 × 3% × 8
B) PV = $500 × (Annuity PV factor, i = 3%, n = 8)
C) PV = $500 × (Annuity FV factor, i = 6%, n = 4)
D) PV = $1,000 × (PV factor, i = 3%, n = 4)
3. Maersk Metal Stamping is analyzing a special investment project. The project will require the purchase of two machines for $30,000 and $8,000 (both machines are required). The total residual value at the end of the project is $1,500. The project will generate cash inflows of $11,000 per year over its 8-year life.
If Maersk requires a 6% return, what is the net present value (NPV) of this project? (Use present value tables or Excel.)
4. Hincapie Manufacturing is evaluating investing in a new metal stamping machine costing $30,924. Hincapie estimates that it will realize $12,000 in annual cash inflows for each year of the machine's 3-year useful life.
Approximately, what is the the internal rate of return (IRR) for the machine? (Use present value tables or Excel.)