B&T is considering the purchase of a machine that promises to reduce operating costs by the same amount for every year of its six-year useful year. The machine costs $83,150 and has no salvage value. It has a 20% internal rate of return. (Ignore income tax in this problem)

What is the annual cost savings promised by the machine?


Consider each of the situation independently

Annual cash inflows from 2 competing investment opportunities are given below. Each investment opportunity requires the same initial investment.

2.1 Compute the present value of the cash inflows for each investment using a 20% discount rate.

2.2 At the end of 3 years, when graduate from college, father has promised to give you a used car that will cost $22,000. What lump sum must he invest now to have the $22,000 at the end of 3 years if he can invest money at (a) 5% and (b) 8%?

2.3 Sam has just won the grand prize on the Wheel & Deal quiz show. He has a choice between (a) receiving $400,000 immediately, and (b) receiving $60,000 per year for 8 years plus a lump sum of $150,000 at the end of the 8-year-period. If he can get a return of 10% on his investments, which option should he accept? (Use present value analysis to show all computations)

2.4 You are a beneficiary in the will of your late Aunt Susan. The executrix of her estate has given you 3 options as to how you may receive your inheritance:

(a) Receiving $50,000 immediately

(b) Receiving $80,000 at the end of 6 years

(c) Receiving $12,000 at the end of each year for 6 years (total: $72,000)

If you can invest money at a 12% return, which option would you prefer?