Business : Accounting Management
What is meant by each of the following statements?
a)”The present value of the future cash flows expected from an
investment project is $20,000,000.
b)”The net present value (NPV) of an investment project is
c)”A project’s cost of capital is 10 percent.
A basketball player has just signed a $30 million contract to
play for three years. She will receive $5 million as an immediate
cash bonus, $5 million at the end of the first year, $8 million at
the end of the second year, and the remaining $12 million at the
end of the contract. Assuming a discount rate of 10 percent, what
is the value of the package?
3)Answer the questions on the two following scenarios:
Perfect Color Company (PCC) is in the business of dyeing
material. Business is booming, and PCC is considering buying a new
color printer. Two printers are available on the market: printer X
costs $50,000, requires $5,000 per year to operate, and has a
useful life of two years; printer Y costs $60,000, requires $7,000
per year to operate, and will need to be replaced every three
years. PCC’s cost of capital is 10 percent.
a)What are the present values of the total costs of the two
printers over their useful life?
b)Why are the two present values not comparable?
c)What is the annual-equivalent cost for each of the
d)Which printer should PCC purchase?
of Pasta Uno is wondering whether to replace the old machine now
or wait another year. Pasta Uno’s cost of capital is 10
a)Assume that the current resale value of the old machine is
zero and that the new machine will also have a zero resale value in
the future. What is the annual-equivalent cash flow of using the
b)What should the management of Pasta Uno do? Explain by
providing justification using concepts learned in lecture,
textbook, and other resources as need. Your explanation should
exhibit critical thinking.