Cowboy Recording Studio is considering the investment of $135,800 in a new recording equipment. It is estimated that the new equipment will generate additional cash flow of $20,000 per year for each year of its 8-year life and will have a salvage value of $13,000 at the end of its life. Cowboys's financial managers estimate that the firm's cost of capital is 8%. Use Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) Required: a. Calculate the net present value of the investment. b. Calculate the present value ratio of the investment. c. What is the internal rate of return of this investment, relative to the cost of capital? d. Calculate the payback period of the investment.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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TABLE 6.4
FACTORS FOR CALCULATING THE PRESENT VALUE OF $1
Discount Rate
No. of
Periods
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1
0.980
0.9615
0.9434
0.9259
0.9091
0.8929
0.8772
0.8621
0.8475
0.8333
0.961
0.9246
0.8900
0.8573
0.8264
0.7972
0.7695
0.7432
0.7182
0.6944
0.6086
0.5158
0.942
0.8890
0.8396
0.7938
0.7513
0.7118
0.6750
0.6407
0.5787
0.924
0.8548
0.7921
0.7350
0.6830
0.6355
0.5921
0.5523
0.4823
0.906
0.8219
0.7473
0.6806
0.6209
0.5674
0.5194
0.4761
0.4371
0.4019
6
0.888
0.7903
0.7050
0.6302
0.5645
0.5066
0.4556
0.4104
0.3704
0.3349
7
0.871
0.7599
0.6651
0.5835
0.5132
0.4523
0.3996
0.3538
0.3139
0.2791
8
0.853
0.7307
0.6274
0.5403
0.4665
0.4039
0.3506
0.3050
0.2660
0.2326
9
0.837
0.7026
0.5919
0.5002
0.4241
0.3606
0.3075
0.2630
0.2255
0.1938
10
0.820
0.6756
0.5584
0.4632
0.3855
0.3220
0.2697
0.2267
0.1911
0.1615
11
0.804
0.6496
0.5268
0.4289
0.3505
0.2875
0.2366
0.1954
0.1619
0.1346
12
0.788
0.6246
0.4970
0.3971
0.3186
0.2567
0.2076
0.1685
0.1372
0.1122
13
0.773
0.6006
0.4688
0.3677
0.2897
0.2292
0.1821
0.1452
0.1163
0.0935
14
0.758
0.5775
0.4423
0.3405
0.2633
0.2046
0.1597
0.1252
0.0985
0.0779
15
0.743
0.5553
0.4173
0.3152
0.2394
0.1827
0.1401
0.1079
0.0835
0.0649
16
0.728
0.5339
0.3936
0.2919
0.2176
0.1631
0.1229
0.0930
0.0708
0.0541
17
0.714
0.5134
0.3714
0.2703
0.1978
0.1456
0.1078
0.0802
0.0600
0.0451
18
0.700
0.4936
0.3503
0.2502
0.1799
0.1300
0.0946
0.0691
0.0508
0.0376
19
0.686
0.4746
0.3305
0.2317
0.1635
0.1161
0.0829
0.0596
0.0431
0.0313
20
0.673
0.4564
0.3118
0.2145
0.1486
0.1037
0.0728
0.0514
0.0365
0.0261
21
0.660
0.4388
0.2942
0.1987
0.1351
0.0926
0.0638
0.0443
0.0309
0.0217
22
0.647
0.4220
0.2775
0.1839
0.1228
0.0826
0.0560
0.0382
0.0262
0.0181
23
0.634
0.4057
0.2618
0.1703
0.1117
0.0738
0.0491
0.0329
0.0222
0.0151
0.0126
0.0105
24
0.622
0.3901
0.2470
0.1577
0.1015
0.0659
0.0431
0.0284
0.0188
25
0.610
0.3751
0.2330
0.1460
0.0923
0.0588
0.0378
0.0245
0.0160
30
0.552
0.3083
0.1741
0.0994
0.0573
0.0334
0.0196
0.0116
0.0070
0.0042
35
0.500
0.2534
0.1301
0.0676
0.0356
0.0189
0.0102
0.0055
0.0030
0.0017
40
0.453
0.2083
0.0972
0.0460
0.0221
0.0107
0.0053
0.0026
0.0013
0.0007
45
0.410
0.1712
0.0727
0.0313
0.0137
0.0061
0.0027
0.0013
0.0006
0.0003
50
0.372
0.1407
0.0543
0.0213
0.0085
0.0035
0.0014
0.0006
0.0003
0.0001
TABLE 6.5
FACTORS FOR CALCULATING THE PRESENT VALUE OF AN ANNUITY OF $1
Discount Rate
No. of
Periods
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1
0.980
0.9615
0.9434
0.9259
0.9091
0.8929
0.8772
0.8621
0.8475
0.8333
2
1.942
1.8861
1.8334
1.7833
1.7355
1.6901
1.6467
1.6052
1.5656
1.5278
3
2.884
2.7751
2.6730
2.5771
2.4869
2.4018
2.3216
2.2459
2.1743
2.1065
3.0373
3.6048
4
3.808
3.6299
3.4651
3.3121
3.1699
2.9137
2.7982
2.6901
2.5887
4.713
4.4518
4.2124
3.9927
3.7908
3.4331
3.2743
3.1272
2.9906
6
5.601
5.2421
4.9173
4.6229
4.3553
4.1114
3.8887
3.6847
3.4976
3.3255
6.472
6.0021
5.5824
5.2064
4.8684
4.5638
4.2883
4.0386
3.8115
3.6046
6.7327
7.4353
8
7.325
6.2098
5.7466
5.3349
4.9676
4.6389
4.3436
4.0776
3.8372
8.162
6.8017
6.2469
5.7590
5.3282
4.9464
4.6065
4.3030
4.0310
10
8.983
8.1109
7.3601
6.7101
6.1446
5.6502
5.2161
4.8332
4.4941
4.1925
11
9.787
8.7605
7.8869
7.1390
6.4951
5.9377
5.4527
5.0286
4.6560
4.3271
12
10.575
9.3851
8.3838
7.5361
6.8137
6.1944
5.6603
5.1971
4.7932
4.4392
13
11.348
9.9856
8.8527
7.9038
7.1034
6.4235
5.8424
5.3423
4.9095
4.5327
14
12.106
10.5631
9.2950
8.2442
7.3667
6.6282
6.0021
5.4675
5.0081
4.6106
15
12.849
11.1184
9.7122
8.5595
7.6061
6.8109
6.1422
5.5755
5.0916
4.6755
16
13.578
11.6523 10.1059
8.8514
7.8237
6.9740
6.2651
5.6685
5.1624
4.7296
17
14.292
12.1657 10.4773
9.1216
8.0216
7.1196
6.3729
5.7487
5.2223
4.7746
18
14.992
12.6593 10.8276
9.3719
8.2014
7.2497
6.4674
5.8178
5.2732
4.8122
19
15.678
13.1339 11.1581
9.6036
8.3649
7.3658
6.5504
5.8775
5.3162
4.8435
20
16.351
13.5903 11.4699
9.8181
8.5136
7.4694
6.6231
5.9288
5.3527
4.8696
21
17.011
14.0292
11.7641
10.0168
8.6487
7.5620
6.6870
5.9731
5.3837
4.8913
22
17.658
14.4511 12.0416
10.2007
8.7715
7.6446
6.7429
6.0113
5.4099
4.9094
23
18.292
14.8568 12.3034
10.3711
8.8832
7.7184
6.7921
6.0442
5.4321
4.9245
24
18.914
15.2470 12.5504
10.5288
8.9847
7.7843
6.8351
6.0726
5.4509
4.9371
25
19.523
15.6221 12.7834
10.6748
9.0770
7.8431
6.8729
6.0971
5.4669
4.9476
30
22.396
17.2920 13.7648
11.2578
9.4269
8.0552
7.0027
6.1772
5.5168
4.9789
35
24.999
18.6646 14.4982
11.6546
9.6442
8.1755
7.0700
6.2153
5.5386
4.9915
40
27.355
19.7928 15.0463
11.9246
9.7791
8.2438
7.1050
6.2335
5.5482
4.9966
45
29.490 20.7200 15.4558
12.1084
9.8628
8.2825
7.1232
6.2421
5.5523
4.9986
50
31.424
21.4822 15.7619
12.2335
9.9148
8.3045
7.1327
6.2463
5.5541
4.9995
Transcribed Image Text:TABLE 6.4 FACTORS FOR CALCULATING THE PRESENT VALUE OF $1 Discount Rate No. of Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 1 0.980 0.9615 0.9434 0.9259 0.9091 0.8929 0.8772 0.8621 0.8475 0.8333 0.961 0.9246 0.8900 0.8573 0.8264 0.7972 0.7695 0.7432 0.7182 0.6944 0.6086 0.5158 0.942 0.8890 0.8396 0.7938 0.7513 0.7118 0.6750 0.6407 0.5787 0.924 0.8548 0.7921 0.7350 0.6830 0.6355 0.5921 0.5523 0.4823 0.906 0.8219 0.7473 0.6806 0.6209 0.5674 0.5194 0.4761 0.4371 0.4019 6 0.888 0.7903 0.7050 0.6302 0.5645 0.5066 0.4556 0.4104 0.3704 0.3349 7 0.871 0.7599 0.6651 0.5835 0.5132 0.4523 0.3996 0.3538 0.3139 0.2791 8 0.853 0.7307 0.6274 0.5403 0.4665 0.4039 0.3506 0.3050 0.2660 0.2326 9 0.837 0.7026 0.5919 0.5002 0.4241 0.3606 0.3075 0.2630 0.2255 0.1938 10 0.820 0.6756 0.5584 0.4632 0.3855 0.3220 0.2697 0.2267 0.1911 0.1615 11 0.804 0.6496 0.5268 0.4289 0.3505 0.2875 0.2366 0.1954 0.1619 0.1346 12 0.788 0.6246 0.4970 0.3971 0.3186 0.2567 0.2076 0.1685 0.1372 0.1122 13 0.773 0.6006 0.4688 0.3677 0.2897 0.2292 0.1821 0.1452 0.1163 0.0935 14 0.758 0.5775 0.4423 0.3405 0.2633 0.2046 0.1597 0.1252 0.0985 0.0779 15 0.743 0.5553 0.4173 0.3152 0.2394 0.1827 0.1401 0.1079 0.0835 0.0649 16 0.728 0.5339 0.3936 0.2919 0.2176 0.1631 0.1229 0.0930 0.0708 0.0541 17 0.714 0.5134 0.3714 0.2703 0.1978 0.1456 0.1078 0.0802 0.0600 0.0451 18 0.700 0.4936 0.3503 0.2502 0.1799 0.1300 0.0946 0.0691 0.0508 0.0376 19 0.686 0.4746 0.3305 0.2317 0.1635 0.1161 0.0829 0.0596 0.0431 0.0313 20 0.673 0.4564 0.3118 0.2145 0.1486 0.1037 0.0728 0.0514 0.0365 0.0261 21 0.660 0.4388 0.2942 0.1987 0.1351 0.0926 0.0638 0.0443 0.0309 0.0217 22 0.647 0.4220 0.2775 0.1839 0.1228 0.0826 0.0560 0.0382 0.0262 0.0181 23 0.634 0.4057 0.2618 0.1703 0.1117 0.0738 0.0491 0.0329 0.0222 0.0151 0.0126 0.0105 24 0.622 0.3901 0.2470 0.1577 0.1015 0.0659 0.0431 0.0284 0.0188 25 0.610 0.3751 0.2330 0.1460 0.0923 0.0588 0.0378 0.0245 0.0160 30 0.552 0.3083 0.1741 0.0994 0.0573 0.0334 0.0196 0.0116 0.0070 0.0042 35 0.500 0.2534 0.1301 0.0676 0.0356 0.0189 0.0102 0.0055 0.0030 0.0017 40 0.453 0.2083 0.0972 0.0460 0.0221 0.0107 0.0053 0.0026 0.0013 0.0007 45 0.410 0.1712 0.0727 0.0313 0.0137 0.0061 0.0027 0.0013 0.0006 0.0003 50 0.372 0.1407 0.0543 0.0213 0.0085 0.0035 0.0014 0.0006 0.0003 0.0001 TABLE 6.5 FACTORS FOR CALCULATING THE PRESENT VALUE OF AN ANNUITY OF $1 Discount Rate No. of Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 1 0.980 0.9615 0.9434 0.9259 0.9091 0.8929 0.8772 0.8621 0.8475 0.8333 2 1.942 1.8861 1.8334 1.7833 1.7355 1.6901 1.6467 1.6052 1.5656 1.5278 3 2.884 2.7751 2.6730 2.5771 2.4869 2.4018 2.3216 2.2459 2.1743 2.1065 3.0373 3.6048 4 3.808 3.6299 3.4651 3.3121 3.1699 2.9137 2.7982 2.6901 2.5887 4.713 4.4518 4.2124 3.9927 3.7908 3.4331 3.2743 3.1272 2.9906 6 5.601 5.2421 4.9173 4.6229 4.3553 4.1114 3.8887 3.6847 3.4976 3.3255 6.472 6.0021 5.5824 5.2064 4.8684 4.5638 4.2883 4.0386 3.8115 3.6046 6.7327 7.4353 8 7.325 6.2098 5.7466 5.3349 4.9676 4.6389 4.3436 4.0776 3.8372 8.162 6.8017 6.2469 5.7590 5.3282 4.9464 4.6065 4.3030 4.0310 10 8.983 8.1109 7.3601 6.7101 6.1446 5.6502 5.2161 4.8332 4.4941 4.1925 11 9.787 8.7605 7.8869 7.1390 6.4951 5.9377 5.4527 5.0286 4.6560 4.3271 12 10.575 9.3851 8.3838 7.5361 6.8137 6.1944 5.6603 5.1971 4.7932 4.4392 13 11.348 9.9856 8.8527 7.9038 7.1034 6.4235 5.8424 5.3423 4.9095 4.5327 14 12.106 10.5631 9.2950 8.2442 7.3667 6.6282 6.0021 5.4675 5.0081 4.6106 15 12.849 11.1184 9.7122 8.5595 7.6061 6.8109 6.1422 5.5755 5.0916 4.6755 16 13.578 11.6523 10.1059 8.8514 7.8237 6.9740 6.2651 5.6685 5.1624 4.7296 17 14.292 12.1657 10.4773 9.1216 8.0216 7.1196 6.3729 5.7487 5.2223 4.7746 18 14.992 12.6593 10.8276 9.3719 8.2014 7.2497 6.4674 5.8178 5.2732 4.8122 19 15.678 13.1339 11.1581 9.6036 8.3649 7.3658 6.5504 5.8775 5.3162 4.8435 20 16.351 13.5903 11.4699 9.8181 8.5136 7.4694 6.6231 5.9288 5.3527 4.8696 21 17.011 14.0292 11.7641 10.0168 8.6487 7.5620 6.6870 5.9731 5.3837 4.8913 22 17.658 14.4511 12.0416 10.2007 8.7715 7.6446 6.7429 6.0113 5.4099 4.9094 23 18.292 14.8568 12.3034 10.3711 8.8832 7.7184 6.7921 6.0442 5.4321 4.9245 24 18.914 15.2470 12.5504 10.5288 8.9847 7.7843 6.8351 6.0726 5.4509 4.9371 25 19.523 15.6221 12.7834 10.6748 9.0770 7.8431 6.8729 6.0971 5.4669 4.9476 30 22.396 17.2920 13.7648 11.2578 9.4269 8.0552 7.0027 6.1772 5.5168 4.9789 35 24.999 18.6646 14.4982 11.6546 9.6442 8.1755 7.0700 6.2153 5.5386 4.9915 40 27.355 19.7928 15.0463 11.9246 9.7791 8.2438 7.1050 6.2335 5.5482 4.9966 45 29.490 20.7200 15.4558 12.1084 9.8628 8.2825 7.1232 6.2421 5.5523 4.9986 50 31.424 21.4822 15.7619 12.2335 9.9148 8.3045 7.1327 6.2463 5.5541 4.9995
Cowboy Recording Studio is considering the investment of $135,800 in a new recording equipment. It is estimated that the new
equipment will generate additional cash flow of $20,000 per year for each year of its 8-year life and will have a salvage value of
$13,000 at the end of its life. Cowboys's financial managers estimate that the firm's cost of capital is 8%. Use Table 6-4 and Table 6-5.
(Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.)
Required:
a. Calculate the net present value of the investment.
b. Calculate the present value ratio of the investment.
c. What is the internal rate of return of this investment, relative to the cost of capital?
d. Calculate the payback period of the investment.
Transcribed Image Text:Cowboy Recording Studio is considering the investment of $135,800 in a new recording equipment. It is estimated that the new equipment will generate additional cash flow of $20,000 per year for each year of its 8-year life and will have a salvage value of $13,000 at the end of its life. Cowboys's financial managers estimate that the firm's cost of capital is 8%. Use Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) Required: a. Calculate the net present value of the investment. b. Calculate the present value ratio of the investment. c. What is the internal rate of return of this investment, relative to the cost of capital? d. Calculate the payback period of the investment.
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