W.T. Anderson is seeking part-time employment while he attends school. He is considering purchasing computer equipment that will enable him to start a small tutoring services company that will offer virtual accounting tutoring services similar to those he utilized while taking his first accounting course at Oklahoma State University. W.T. expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows: Year of Operation Cash Inflow Cash Outflow $13,600 20,200 22,600 22,600 Year 1 $ 9,200 11,500 13,500 13,500 Year 2 Year 3 Year 4 In addition to these cash flows, W.T. expects to pay $21,900 for the computer equipment. He also expects to pay $3,400 for a major overhaul and updating of the equipment at the end of the second year of operation. The equipment is expected to have a $1,400 salvage value and a four-year useful life. W.T. desires to earn a rate of return of 10 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.) b. Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return and whether it should be accepted. a. Net present value b. Will the return be above or below the cost of capital? Should the investment opportunity be accepted?
W.T. Anderson is seeking part-time employment while he attends school. He is considering purchasing computer equipment that will enable him to start a small tutoring services company that will offer virtual accounting tutoring services similar to those he utilized while taking his first accounting course at Oklahoma State University. W.T. expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows: Year of Operation Cash Inflow Cash Outflow $13,600 20,200 22,600 22,600 Year 1 $ 9,200 11,500 13,500 13,500 Year 2 Year 3 Year 4 In addition to these cash flows, W.T. expects to pay $21,900 for the computer equipment. He also expects to pay $3,400 for a major overhaul and updating of the equipment at the end of the second year of operation. The equipment is expected to have a $1,400 salvage value and a four-year useful life. W.T. desires to earn a rate of return of 10 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.) b. Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return and whether it should be accepted. a. Net present value b. Will the return be above or below the cost of capital? Should the investment opportunity be accepted?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:W.T. Anderson is seeking part-time employment while he attends school. He is considering purchasing computer equipment that will
enable him to start a small tutoring services company that will offer virtual accounting tutoring services similar to those he utilized
while taking his first accounting course at Oklahoma State University. W.T. expects demand for the service to grow rapidly in the first
two years of operation as customers learn about the availability of the assistance. Thereafter, he expects demand to stabilize. The
following table presents the expected cash flows:
Year of
Operation Cash Inflow Cash Outflow
$13,600
20,200
22,600
22,600
Year 1
$ 9,200
11,500
13,500
13,500
Year 2
Year 3
Year 4
In addition to these cash flows, W.T. expects to pay $21,900 for the computer equipment. He also expects to pay $3,400 for a major
overhaul and updating of the equipment at the end of the second year of operation. The equipment is expected to have a $1,400
salvage value and a four-year useful life. W.T. desires to earn a rate of return of 10 percent. (PV of $1 and PVA of $1) (Use appropriate
factor(s) from the tables provided.)
Required
a. Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round
intermediate calculations and final answer to 2 decimal places.)
b. Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return and
whether it should be accepted.
a. Net present value
b.
Will the return be above or below the cost of capital?
Should the investment opportunity be accepted?
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