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.
1. What is the Net Present Value of the above business? (10 points)
Required:
cost of the business $ 140,000.00
cash flows $ 50,000.00
interest 6%
YR Cashflows PVIFN,6%
0 $ (140,000.00) 1.00000
1 $ 50,000.00 0.94340
2 $ 50,000.00 0.89000
3 $ 50,000.00 0.83962
4 $ 50,000.00 0.79209
5 $ 50,000.00 0.74726
6 $ 50,000.00 0.70496
7 $ 50,000.00 0.66506
8 $ 50,000.00 0.62741
NPV

2. Should the Magnum Corporation purchase the new business based upon the results of
answer; Yes
Reason The project has a positive net present value because it will add the net worth of the shareholders

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

about purchasing? (5 points)

The ratio of the NPV of a project to the initial outlay required for it. The index is an efficiency measure for investment decisions
NPV $ 170,489.69
Initial money outlay $ 140,000.00
Present Value Index=NPV/Cash outlay
1.22
Decision;
A ratio of more than 1 indicates a profitable investment,

4. What is the Payback period for the purchase of the new business? (10 points)
YR Cashflows cumulative cash flows
0 $ (140,000.00) $ (140,000.00)
1 $ 50,000.00 $ (90,000.00)
 2 $ 50,000.00 $ (40,000.00)
3 $ 50,000.00 $ 10,000.00
4 $ 50,000.00 $ 60,000.00
5 $ 50,000.00 $ 110,000.00
6 $ 50,000.00 $ 160,000.00
7 $ 50,000.00 $ 210,000.00
8 $ 50,000.00 $ 260,000.00

PBP 2+40,000/50,000
2.8 Years

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

Net present value is a technique used in

capital budgeting in decision whether to
invest on a project or not.
What is NPV?

This the capital budgeting technique which

used the discounted cash flows to calculate
net present value of cash flows from a
project.

This means that a net present value

analysis evaluates the cash flows forecasted
to be delivered by a project by discounting
them back to the present using the time
span of the project (t) and the firm's
weighted average cost of capital (i).

6 Roberto
Earnings per year $ 45,000.00
Begin investing 15% of the salary 15%
Time/period in years 40
Rate of returns on investments of funds 8%
What amount will Roberto have in his 401K Retirement account when he retires in 40 years?

15% of the salary $ 6,750.00

P = PMT [((1 + r)n - 1) / r]

Where:
 P = The future value of the annuity stream to be paid in the future

PMT = The amount of each annuity payment

r = The interest rate

n = The number of periods over which payments are made

pmt $ 6,750.00
r 8%
n 40

P = 6,750 [((1 + 0.08)^40 - 1) / 0.08] $ 1,748,631.50

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

pmt $ 6,750.00
time 40
$ 270,000.00
amount earned $ 1,478,631.50
 PVCFL
$ (140,000.00)
$ 47,169.81
$ 44,499.82
$ 41,980.96
$ 39,604.68
$ 37,362.91
$ 35,248.03
$ 33,252.86
$ 31,370.62
$ 170,489.69

rth of the shareholders

fficiency measure for investment decisions under capital rationing.

etires in 40 years?