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ACCT 301 Week 7 – Homework Solution

ACCT 301 Week 7 – Homework Solution

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ACCT 301 Week 7 – Homework Solution

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ACCT 301 Week 7 – Homework Solution

Week 7 – Homework Assignment

Magnum Corporation is considering the purchase of a new business that will increase

their annual cash flows by $50,000 per year for 8 years. The business will cost

$140,000 and the current market rate of interest is 6%.

Use the Present Value tables or Excel to answer the following questions.

Required:

1. What is the Net Present Value of the above business?  (10 points)

2.     Should the Magnum Corporation purchase the new business based upon the results of

   the NPV method?  Why?  Why not? (10 points) 

3. What is the Present Value Index for the business that Magnum is thinking

about purchasing?  (5 points)

4. What is the Payback period for the purchase of the new business?  (10 points)

5. Briefly describe the Net Present Value Method of Capital Budgeting.  (5 points)

6. Roberto just graduated from college and he is currently earning $45,000

per year.  Roberto has decided that he would like to begin investing 15% of

his annual salary into his 401K plan at work for the next 40 years.

Roberto plans to invest his 401K retirement funds into a mutual fund of

stocks and bonds that is expected to earn 8% into the foreseeable future.

Roberto is not planning on taking any money out of his retirement account

until he retires.   (10 points)

    What amount will Roberto have in his 401K Retirement account when he retires in 40 years? 

    How much money will Roberto have earned in his retirement account after 40 years?

 

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