Boulder Creek Industries is considering an investment in equipment based on the following estimates:

Cost of equipment........................................$3,000,000

Residual value................................................200,000

Useful life.........................................................10 years

a. Determine the net present value of the equipment, assuming a desired rate of return of 12% and annual net cash flows of $800,000. Use the present value tables appearing in Exhibits 2 and 5 of this chapter.

b. Determine the net present value of the equipment, assuming a desired rate of return of 12% and annual net cash flows of $400,000, $600,000, and $800,000. Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer.

c. Determine the net present value of the equipment, assuming a desired rate of return of 15% and annual net cash flows of $400,000, $600,000, and $800,000. Use the present value tables (Exhibits 2 and 5) provided in the chapter in determining your answer.

d. Determine the minimum annual net cash flow necessary to generate a positive net present value, assuming a desired rate of return of 12%. Round to the nearest dollar.

e. Interpret the results of parts (b), (c), and (d).

Exhibit 2:

Exhibit 5:

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Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.893 0.797 0.943 0.890 0.840 0.909 0.826 0.870 0.833 0.694 0.579 0.482 0.756 3 0.751 0.683 0.621 0.564 0.712 0.636 0.567 0.507 0.452 0.404 0.658 4 0.792 0.747 0.705 0.665 0.627 0.592 0.558 0.572 0.497 0.432 0.376 0.327 0.284 0.247 0.402 0.335 0.279 0.513 8 0.233 0.467 0.424 0.386 0.361 0.322 0.194 0.162 10 Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.893 1.690 2.402 0.943 1.833 2.673 3.465 4.212 4.917 5.582 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 0.870 1.626 2.283 2.855 3.353 3.785 4.160 4.487 4.772 1 0.833 1.528 3 2.106 3.037 3.605 4.111 4.564 4.968 5.328 5.650 2.589 2.991 3.326 3.605 3.837 4.031 4 5 8 9. 6.210 6.802 4.192 10 7.360 5.019