Investment Opportunities of Alex Myrick Accounting Help With Solution

Investment Opportunities of Alex Myrick Accounting Help

 
1.Using net present value and payback period to evaluate investment opportunities:
 
Alex Myrick saved $400,000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and has begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $300,000. The following table presents the estimated cash inflows for the two alternatives.

 

Year 1Year 2Year 3Year 4
Opportunity #1$ 89,000$ 94,000$126,000$162,000
Opportunity #2164,000174,00028,00024,000

 
Mr. Myrick decides to use his past average return on mutual fund investments as the discount rate; it is 8 percent.
 
Required:
 
a. Compute the net present value of each opportunity. Which should Mr. Myrick adopt based on the net present value approach?
 
b. Compute the payback period for each project. Which should Mr. Myrick adopt based on the payback approach?
 
c. Compare the net present value approach with the payback approach. Which method is better in the given circumstances?
 
 

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2.Using net present value and internal rate of return to evaluate investment opportunities
 
Gary Coshatt’s rich uncle gave him $100,000 cash as a gift for his 40th birthday. Unlike his spoiled cousins who spend money carelessly, Mr. Coshatt wants to invest the money for his future retirement. After an extensive search, he is considering one of two investment opportunities. Project 1 would require an immediate cash payment of $88,000; Project 2 needs only a $40,000 cash payment at the beginning. The expected cash inflows are $28,800 per year for Project 1 and $14,000 per year for Project 2. Both projects are expected to provide cash flow benefits for the next four years. Mr. Coshatt found that the interest rate for a four-year certificate of deposit is about 7 percent. He decided that this is his required rate of return.
 
Required
 
a. Compute the net present value of each project. Which project should Mr. Coshatt adopt based on the net present value approach?
 
b. Compute the approximate internal rate of return of each project. Which project should Mr. Coshatt adopt based on the internal rate of return approach?
 
c. Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances?
 
 
3.Applying the net present value approach with and without tax considerations
 
Henry Harper, the chief executive officer of Harper Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $200,000 cash at the beginning of the investment and the cash inflow for each of the following four years to be the following.
 

Year 1Year 2Year 3Year 4
$42,000$48,000$60,000$92,000

 
Mr. Harper agrees with his advisers that the company should use the discount rate (required rate of return) of 12 percent to compute net present value to evaluate the viability of the proposed project.
 
Required:
 
a. Compute the net present value of the proposed project. Should Mr. Harper approve the project?
 
b. Lydia Hollman, one of the advisers, is wary of the cash flow forecast and she points out that the advisers failed to consider that the depreciation on equipment used in this project will be tax deductible.
 
The depreciation is expected to be $40,000 per year for the four-year period. The company’s income tax rate is 30 percent per year. Use this information to revise the company’s expected cash flow from this project.
 
c. Compute the net present value of the project based on the revised cash flow forecast. Should Mr. Harper approve the project?
 
4.The management of Pacific Utilities Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:
 

YearGenerating UnitDistribution Network Expansion
1$370,000$280,000
2370,000280,000
3370,000280,000
4370,000280,000

 
The generating unit requires an investment of $1,172,900, while the distribution network expansion requires an investment of $850,360. No residual value is expected from either project.
 
Required:
 
1a.Compute the net present value for each project. Use a rate of 6% and the present value of an annuity of $1 in above table. If required, round to the nearest dollar.
 
b.Compute a present value index for each project. If required, round your answers to two decimal places.
 
2. Determine the internal rate of return for each project by:
 
(a) computing a present value factor for an annuity of $1 and
(b) using the present value of an annuity of $1 in above table. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.
 
3. What advantage does the internal rate of return method have over the net present value method in comparing projects?
 
 

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