Question

(Ignore income taxes in this problem.) Peter wants to buy a computer which he expects to save him $4,000 each year in bookkeeping costs. The computer will last for five years, and at the end of five years it will have no salvage value. If Peter's required rate of return is 9%, what is the maximum price Peter should be willing to pay for the computer now?

Click here to view Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using tables.

$15,560

$12,480

$11,970

$20,000

question 2)

(Ignore income taxes in this problem.) The Sawyer Corporation has $130,000 to invest and is considering two different projects, X and Y. The following data are available on the projects:

Click here to view Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using tables.

	Project X	Project Y
Cost of equipment needed now	$130,000	-
Working capital requirement	-	$130,000
Annual cash operating inflows	$36,000	$31,000
Salvage value in 5 years	$ 6,000	-

Both projects will have a useful life of 5 years; at the end of 5 years, the working capital will be released for use elsewhere. Sawyer's discount rate is 12%.

The net present value of project X is closest to:

Noreen 4e Recheck 2017-22-03

($8,573)

$2,780

$2,148

$3,182

Answer 1

Answer- The maximum price Peter should be willing to pay for the computer now = Annual saving in bookkeeping costs*Discount factor @9%

= $4000*3.89

= $15560.

Answer-The net present value of project X is closest to= $3182.

Explanation-

Sawyer Corporation
Net Present Value
	Project X
Particulars		Present Value Factor @12%	Present value
	(a)	(b)	(c=a*b)
Net cash inflow per year (For 5 years)	36000	3.605	129780
New Equipment (1st Year)	-130000	1	-130000
Salvage value (6th year)	6000	0.567	3402
Net Present Value			3182