Case 1 Answer 1

A. Fv 5 = Pv * FVIF 5yr 8%
n = 5 th Fv 5 = $15,000 * 1.4693 = $ 22,039.5
Pv = $15,000
Fv = $25,000 The trip cost $25000, so the account still have the
i = 8% shortfall up to -$2.960,08
Annuity (A) = $500
Factor FVIF 5th 8% = 1.4693
Factor FVIFA 5yr 8% = 6.336
Questions :
A. Will you have enough money in that vacation
account on your 40th birthday to take the trip? B. Fv 5 = (Pv * FVIF 5yr 8% ) + (A * FVIFA 5yr 8%)
What will be the surplus, or shortfall, in that
account when you turn 40? (Hint: Exhibit 1 will be Fv 5 = $ 22,039.5 + ($500* 6.336) = $ 25,208
useful in answering this question.) Total account on 40th birthday = $ 25.208
B. If you had to, you could further fund the trip by Surplus $208 for trip cost
making, starting today, five annual $500
contributions to the account. If you adhered to such
a plan, how much will be in the account on your
40th birthday? (Hint: Exhibit 3 and the answer to
part (a) above will both be useful in answering this
question.)
Case 2 Answer 2
A. Pv = Fv / (1+0,18)^4 or PV = Fv * PVIF
Fv = $50 Million
Pv = $50 Million / 1,939 = $25, 79 Million
i = 18%
n = 4 years
Factor PVIF 4th 18% = 0.5158
Factor PVIFA = 4 th 18% = 2.690

A. What lump-sum dollar amount would you be

willing to accept today instead of the $50 million in B. PV = 25,79 M
four years? (Hint: Exhibit 2 will be useful in N=4
answering this question.) I = 18%
B. Alternatively, what four yearly receipts, starting a CF = 25,79 M / 2,690 = 9,58 M
year from now, would you be willing to accept? (Hint:
Exhibit 4 and the answer to part (a) above will both
be useful in answering this question.)
Case 3 Answer 3
Annuity = $40,000 a. Annuity = $48,000

i = 6% i = 6%
n = 10 years
n = 12 years
Factor PVIFA 10yr 6% = 7.360
Factor PVIFA 12yr 6% = 8.384
PVA = A x PVIFA 12yr 6%
Questions :
PVA = $48,000 x 7.360
What is the maximum price you would be willing pay today for
an installed, automated golf course sprinkler system? PVA = $353,280

A. Redo your calculation using a 10-year time period and $48.000 So, if using 10-year time period and $48.000 in annual
in annual savings savings, we pay for an installed, automated golf course
sprinker system is $353,280
B. Redo your initial calculation one more time using $50.000 in
annual savings for the first six year and $30.000 in annual savings
for the next six year b. A1 = $50,000; A2 = $30,000
i = 6%
Answer :
N1 = N2= 6 years
PVA = A x PVIFA 12 6%
yr
Factor PVIFA 6yr 6% = 4.917
PVA = $40,000 x 8,384 PVA = (A1 x PVIFA 6yr 6%) + (A2 x PVIFA 6yr 6%)
PVA = $335,360 PVA =( $50,000 x 4.917) + ($30,000 x (8.384 - 4.917))

So, if using 12-year time period and $40.000 in annual savings, we
pay for an installed, automated golf course sprinker system is
$335,360
PVA = $245,850 + $104.010
PVA = $349,860
We will pay $349,860 if $50.000 annual savings for the first six year
and $30.000 in annual savings for the next six years
 NPV
Manual

year Payment PV PV per year

1 50.000 0,943396 47169,81132

2 50.000 0,889996 44499,822

3 50.000 0,839619 41980,96415

4 50.000 0,792094 39604,68316

5 50.000 0,747258 37362,90864

6 50.000 0,704961 35248,02702

7 30.000 0,665057 19951,71341

8 30.000 0,627412 18822,37114

9 30.000 0,591898 17756,95391

10 30.000 0,558395 16751,84331

11 30.000 0,526788 15803,62576

12 30.000 0,496969 14909,08091

349861,8047
Case 4
The cafeteria you operate has a regular clientele for all three meals, seven days a week. You want to expand

your product line beyond what you are currently able to offer. To do so requires the purchase of some

additional specialty equipment costing $45,000, but you project a resultant increase in sales (after deducting

the cost of sales) of about $8,000 per year for each of the next eight years with this new equipment.

Assuming a required rate of return (i.e., a hurdle rate) of 8%, should you pursue this opportunity? Why or

why not? Do the analysis under two conditions:

a. You are part of an income-tax-exempt enterprise.

b. The enterprise you are part of is subject to a 40% corporate income tax rate, and the straight-line,

depreciable life of the equipment you are contemplating purchasing is five years.
• Investment value : 45.000
• Annuity : 8.000
• Interest : 8%
• N : 8 years
a. If the company part of an income-tax-exempt enterprise

• Net present value (NPV) = 45.973,11 – 45.000

= 973,11
• NPV measures the profitability of an investment. If NPV is positive, it measures the
increase in wealth. It also indicates the increase in the value of company resulting from an
investment.
• The NPV value is greater than 0 the investment is profitable and it is acceptable.
b. The enterprise you are part of is subject to a 40% corporate income tax rate, and the straight-line,
depreciable life of the equipment you are contemplating purchasing is five years.
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue 8000 8000 8000 8000 8000
Depreciation expense 9000 9000 9000 9000 9000
EBIT -1000 -1000 -1000 -1000 -1000
Taxes (40%) -400 -400 -400 -400 -400
Net operating profit after taxes -600 -600 -600 -600 -600
Depreciation 9000 9000 9000 9000 9000
Operating cash flow 8400 8400 8400 8400 8400

• Present value of cash inflows = A x PVIFA(8%, 5 years)

= 8.400 x 3,993
= 33.538,8
• NPV = Present value of cash inflows – initial investment
= 33.538,8 – 45.000
= -11.461,2

The NPV is less than zero means that the earning is less than the required rate of return, so the investment
should be rejected.
Case 5
• You are contemplating the purchase of a one-half interest in a corporate
airplane to facilitate the expansion of your business into two new geographic
areas. The acquisition would eliminate about $220,000 in estimated annual
expenditures for commercial flights, mileage reimbursements, rental cars, and
hotels for each of the next 10 years. The total purchase price for the half-share
is $6 million, plus associated annual operating costs of $100,000. Assume the
plane can be fully depreciated on a straight-line basis for tax purposes over 10
years. The company’s weighted average cost of capital (commonly referred to
as WACC) is 8%, and its corporate tax rate is 40%. Does this endeavor present
a positive or negative net present value (NPV)? If positive, how much value is
being created for the company through the purchase of this asset? If negative,
what additional annual cash flows would be needed for the NPV to equal zero?
To what phenomena might those additional positive cash flows be ascribable?
• Acquisition cost : 6.000.000
• Interest rate : 8%
• N : 10 years
• Estimated expenditure as expense saving: 220.000
• Annual operating cost: 100.000
Expense saving 220.000
Operating cost 100.000
Earning before depreciation, interest & tax 120.000
Depreciation per year 600.000
EBIT -480.000
Tax 40% -192.000
Net operating profit after taxes -288.000
Depreciation per year 600.000
Cash flow annuity 312.000
• Present value of cash inflows = A x PVIFA(8%, 10 years)
= 312.000 x 6,710
= 2.093.545,4
• NPV = Present value of cash inflows – initial investment
= 2.093.545,4 – 6.000.000
= -3.906.454,6
• To make NPV = 0, need additional present value of cash inflows 3.906.454,6.
• So, need additional revenue per year:
PV = A x PVIFA
To make NPV = 0, need additional present value of cash inflows
3.906.454,6 = A x 6,710
A = 582.176,932

The cash flow can be increased by reducing the operating costs and increase
more on the savings.
Case 6
The final tally is in: This year’s operating costs were down
$100,000, a decrease directly attributable to the $520,000 investment
in the automated materials handling system put in place at the
beginning of the year. If this level of annual savings continues for
five more years, resulting in six total years of annual savings, what
compounded annual rate of return will that represent? If these annual
savings continue for nine more years, what compounded annual rate
of return will that represent? (You may ignore income taxes.)
• Present value factors (Annual rate of return) in 6 years = α (asked)
• To return the $520,000 investment, future value of annual savings need to be
calculated
• Present value annual savings = Present value factors x Future value amount for
anual savings
α X $100,000 = $100,000α
• To return the investment :
Present value annual savings = Investment cost = $520,000
$520,000 = $100,000α
α = 5,2

From the Present Value Factors for a series of amounts n Years in the future, for
the present value factors of approximatetly 5,2 in 6 years time so the annual rate
of return is 4% and in 10 years the annual return is 14%.