QUESTION

# 3. John has just won the Flyball Lottery. He has two options for receiving his prize. The first option is to accept a \$135,000 cash payment today. The second option is to receive \$17,700 at the end of

3. John has just won the Flyball Lottery. He has two options for receiving his prize. The first option is to accept a \$135,000 cash payment today. The second option is to receive \$17,700 at the end of each of the next 19 years and a \$37,900 lump sum payment in the 20th year. John can invest money at a 10% rate.(a) Calculate the present value of the two options. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)                                                              Option 1                                   Option 2

Present value                                           ?                                                  ?Which option should John choose to receive his winnings?                                                           (b) If John could invest money at 13%, calculate the present value of the two options. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)                            Option 1                                        Option 2

Present value                ?                                               ?Which option should he choose?

4.Flounder’s Lawn Service needs to purchase a new lawnmower costing \$8,416 to replace an old lawnmower that cannot be repaired. The new lawnmower is expected to have a useful life of 6 years, with no salvage value at the end of that period.(a)If Flounder’s required rate of return is 11%, what level of annual cash savings must the lawnmower generate to be considered an acceptable investment under the net present value method? (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)Annual cash savings should be\$enter the annual cash savings in dollars

(b)If Flounder’s required rate of return is 18%, what level of annual cash savings must the lawnmower generate to be considered an acceptable investment under the net present value method? (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)Annual cash savings should be\$enter the annual cash savings in dollars

5.The Bramble Company is planning to purchase \$487,000 of equipment with an estimated 7-year life and no estimated salvage value. The company has projected the following annual cash flows for the investment:Year                 Projected Cash Flows

1                                            \$207,000

2                                            132,000

3                                              109,000

4                                               51,700

5                                              61,200

6                                          44,400

7                                             46,300

Total                                      \$651,600a. Calculate the net present value of the proposed equipment purchase. Bramble uses a 6% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971.)?

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