Chapter 5 Questions & Problems: 22. Perpetuities. A local bank advertises the following deal: “Pay us $100 a year for 10 years and then we will pay you (or your beneficiaries) $100 a year forever.” Is this a good deal if the inter est rate is 6%? (LO5-3) 23. Perpetuities. A local bank will pay you $100 a year for your lifetime if you deposit $2,500 in the bank today. If you plan to live forever, what interest rate is the bank paying? (LO5-3) 24. Perpetuities. A property will provide $10,000 a year forever. If its value is $125,000, what must be the discount rate? (LO5-3) 34. Annuity Due. Your landscaping company can lease a truck for $8,000 a year (paid at year-end) for 6 years. It can instead buy the truck for $40,000. The truck will be valueless after 6 years. The interest rate your company can earn on its funds is 7%. (LO5-3) a. What is the present value of the cost of leasing? b. Is it cheaper to buy or lease? c. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? d. Is it now cheaper to buy or lease? Chapter 8 Questions & Problems 1. Cash Flows. Quick Computing currently sells 10 million computer chips each year at a price of $20 per chip. It is about to introduce a new chip, and it forecasts annual sales of 12 million of these improved chips at a price of $25 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 3 million per year. The old chips cost $6 each to manufacture, and the new ones will cost $8 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip? (LO9-1) 2. Incremental Cash Flows. A corporation donates a valuable painting from its private collection to an art museum. Which of the following are incremental cash flows associated with the dona tion? (LO9-1) a. The price the firm paid for the painting b. The current market value of the painting c. The deduction from income that it declares for its charitable gift d. The reduction in taxes due to its declared tax deduction 3. Cash Flows. Conference Services Inc. has leased a large office building for $4 million per year. The building is larger than the company needs; two of the building’s eight stories are almost empty. A manager wants to expand one of her projects, but this will require using one of the empty floors. In calculating the net present value of the proposed expansion, senior manage ment allocates one-eighth of $4 million of building rental costs (i.e., $.5 million) to the project expansion, reasoning that the project will use one-eighth of the building’s capacity. (LO9-1) a. Is this a reasonable procedure for purposes of calculating NPV? b. Can you suggest a better way to assess a cost of the office space used by the project? 4. Cash Flows. A new project will generate sales of $74 million, costs of $42 million, and depreciation expense of $10 million in the coming year. The firm’s tax rate is 30%. In Section 9.3, we described three methods for dealing with depreciation. Calculate cash flow for the year using: (LO9-2) a. Method 1: Dollars in minus dollars out. b. Method 2: Adjusted accounting profits. c. Method 3: Add back depreciation tax shield. d. If the discount rate is 12%, what is the present value of the depreciation tax shield? 5. Cash Flows. Tubby Toys estimates that its new line of rubber ducks will generate sales of $7 million, operating costs of $4 million, and a depreciation expense of $1 million. If the tax rate is 25%, what is the firm’s operating cash flow? (LO9-2)Best online assignments help service
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