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BartSMP [9]
3 years ago
7

Random Co. purchased a machine for $400,000 that has a five year life and will produce annual net cash inflows of $110,000 per y

ear over the life of the machine. The present value of an annuity for 5 years at an 8% cost of capital is 3.993. Calculate the Net Present Value and Payback Period of this investment.
Business
1 answer:
inysia [295]3 years ago
5 0

Answer:

NPV = $39,230

Payback period = 3.64 years

Explanation:

The net present value (NPV) = (net annual cash flow x interest factor) - investment

NPV = ($110,000 x 3.993) - $400,000 = $439,230 - $400,000 = $39,230

The payback period = investment / net annual cash flow = $400,000 / $110,000 = 3.64 years or 3 years, 7 months and 19 days

You can also calculate the PV of each annual cash flow which will give you a more precise result, but the variation is minimal:

PV = ($110,000 / 1.08) + ($110,000 / 1.08²) + ($110,000 / 1.08³) + ($110,000 / 1.08⁴) + ($110,000 / 1.08⁵) = $439,198

and the NPV = $39,198

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On December 31, 2020, Grand Company had $1,232,000 of short-term debt in the form of notes payable due February 2, 2021. On Janu
VikaD [51]

Answer:

Current liabilities:

Notes payable   $8,000

Non-current/long-term liabilities:

Notes payable     $1,224,000

Explanation:

The actual amount of notes payable at 31st December is the difference between the short-term debt and the amount of cash realized from the issue of common stock whose proceeds are meant to be used in liquidating the short-term debt.

The actual amount of notes payable=$1,232,000-$1,224,000=$8,000

By issuing common stock of $1,224,000 to repay the short-term debt,the $1,224,000 is effectively converted to funding of long-term nature,hence classified as long-term liabilities

7 0
3 years ago
Closing entries are journalized and posted:_______.
Gnoma [55]

Answer:

The correct answer is letter "B": after the financial statements are prepared.

Explanation:

A closing entry is a journal entry after the preparation of the financial statements, at the end of an accounting period. This closes a temporary account and moves all the information either to a permanent balance sheet or to the income statement. Temporary accounts include revenue, expenses, and dividends and must be closed at the end of the year.

6 0
3 years ago
The following statements are true. Explain why. a. If a bond’s coupon rate is higher than its yield to maturity, then the bond w
krok68 [10]

Answer:

A Bond's current market value represented by B_{0} is the present value of a bond as on today. Present value of a bond is it's future cash flows in the form of coupon payments and principal repayment discounted at investor's expectation in the market also referred to as Yield to maturity(YTM).

Present value of a bond is given by the following equation,

B_{0} = \frac{C}{(1\ +\ YTM)^{1} }  +\ \frac{C}{(1\ +\ YTM)^{2} } \ +\ ......+\ \frac{C}{(1\ +\ YTM)^{n} } \  +\ \frac{RV}{(1\ +\ YTM)^{n} }

where C= Annual coupon payments

YTM = Yield to maturity/ cost of debt/ market rate of return on similarly priced bonds

RV = Redemption value of bond

n = number of years to maturity

<u>a. A bond's coupon rate is higher than it's yield to maturity, then the bond will sell for more than face value.</u>

Hence, if the company pays more interest than what is paid in the market on similarly priced bonds, such bonds shall sell at more than their face value.

<u>b. If a bond's coupon rate is lower than it's yield to maturity, then the bond's price will increase over it's remaining maturity.</u>

Similarly, if a bond pays lower rate of interest than the market rate of interest on similarly priced bonds, the bond shall sell at lower than it's face value and the price will increase over the remaining life of such bonds.

         

6 0
3 years ago
An increase in investment shifts the ae curve upward by an amount equal to the​ ______, and shifts the ad curve rightward by an
kogti [31]
<span>An increase in investment shifts the AE curve upward by an amount equal to the​ change in investment, and shifts the AD curve rightward by an amount equal to the​ change in the investment by the multiplier.
The AE curve stands for the aggregate expenditure which measures expenditures on consumption. The AD curve stands for the aggregate demand curve which measures the demand levels when prices change for a good or service in an economy. 

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5 0
3 years ago
Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division’s retu
almond37 [142]

Answer:

a. Project's net present value is $1,015,163.09

b. Simple rate of return is 15%

c. Yes. The reason is that the project has a positive net present value of $1,015,163.09.

d. No. The reason is that the simple rate of return of 15% obtained in part b is lower the division’s return on investment (ROI), which has been above 20% each of the last three years.

Explanation:

a. Compute the project's net present value.

To compute this, we first calculate the annual cash inflow as follows:

Annual cash inflow = Net operating income + Depreciation = $452,000 +  $828,000 = $1,,280,000

Now, the project's net present value can be calculated using the formula for calculating the present of an ordinary annuity as follows:

PV = P * [{1 - [1 / (1 + r)]^n} / r] …………………………………. (1)

Where;

PV = Present value of the annual cash flow = ?

P = Annual cash inflow = $1,280,000

r = Discount rate = 17%, or 0.17

n = Equipment useful years = 5

Substitute the values into equation (1) to have:

PV = $1,280,000 * [{1 - [1 / (1 + 0.17)]^5} / 0.17]

PV = $4,095,163.09

Project's net present value = PV - Project's initial investment = $4,095,163.09 - $3,080,000 = $1,015,163.09

b. Compute the project's simple rate of return

This can be computed as follows:

Simple rate of return = Net operating income / Initial investment =  $452,000 / $3,080,000 = 0.15, or 15%

c. Would the company want Derrick to pursue this investment opportunity?

Yes. The reason is that the project has a positive net present value of $1,015,163.09.

Note that had it been the net present value of the project was negative, the company would not want to Derrick to pursue this investment opportunity since the decision of the company is based on whether the project's NPV is positive or negative.

d. Would Derrick be inclined to pursue this investment opportunity?

No. The reason is that the simple rate of return of 15% obtained in part b is lower the division’s return on investment (ROI), which has been above 20% each of the last three years.

Pursuing this investment opportunity will therefore reduce the Overall ROI of the division and Derrick will not get annual pay raises if this happens.

8 0
3 years ago
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