Question

Answer each of the following questions, which are independent from each other.

For all time value of money calculations, use time value of money factors with at least 4 decimal places and do not round intermediate calculations; instead, only round your final answer to the nearest whole number.

Speedy Delivery Company is considering two different machines for use in its sorting facility and the company's management put together the following cash flow estimates: Model DQT Model MK6 Purchase cost 18,000 26,000 Estimated net cash inflows: Year 1 9,000 12,000 Year 2 7,000 10,000 Year 3 5,000 9,000 Year 4 4,000 6,000

Answer 1

Solution Question #1 Required (a): Cash payback period of each model Step-1: Compute the cumulative cash flows for both the Machines Model DQT Model MK6 Year Cash flows Cash flows ($18,000) $9,000 $7,000 $5,000 $4,000 Cumulative cash flows ($18,000) ($9,000) ($2,000) $3,000 $7,000 ($ 26,000) $12,000 $10.000 $9,000 $6,000 Cumulative cash flows ($26,000) ($14,000) ($4.000) $5,000 $11,000 Step-2: Compute the cash payback period Model DOT Cash payback period = 2 Years +2,000 / 5,000 = 2.40 Years Model MK6 Cash payback period = 2 Years +4,000 / 9,000 = 2.44 Years Required (b): NPV of each model Model DQT Model MK6 Year PV factor @ 10% Present value Cash flows of cash flows Cash flows Present value of cash flows CONO 0.90909 0.82645 0.75131 0.68301 NPV = ($18,000) $9,000 $7,000 $5,000 $4,000 ($18,000) $8,182 $5,785 $3,757 $2,732 $2,456 ($ 26,000) $12.000 $10,000 $9,000 $6,000 ($ 26,000) $10,909 $8,265 $6,762 $4,098 $4,033 The NPV of Model MK6 machine is greater than the NPV of Model DQT, hence model MK6 should be selected. Question #2 $275,000 Cost of new home Interest rate on loan Total no. of Annual payments 4% 15 Present value annuity factor of $1 @ 4% for 15 Years 11.11839 Annual payment ($275,000 / 11.11839) Total payments over the life of loan ($24,733.80 x 15 year) Less: Loan amount (Cost of new home) Total interest payment over the life of the loan $24,733.80 $371,007 ($275,000) $96,007 Question #3 Investment made Rate of interest $500 6% Future value factor of $1 @ 6% for 3 years = (1+6%)^3 = 1.19102 Balance in account in 3 years = $500 x 1.19102 = $596 Note: All the present value factors are rounded upto 5 decimal places.