A department head wants to buy a $100,000 machine that will cut costs saving the company...

  

 

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A department head wants to buy a $100,000 machine that will cut costs saving the company a lot of money. When pushed, the department head made the following predictions on savings (positive cash flow). You have other investment opportunities, so you will only approve this request if it returns at least 12% return on investment (ROI). End of year one cash savings End of year two cash savings End of year three cash savings End of year Four cash savings No additional savings anticipated in future years. total savings 45,000 28,000 25,000 18,000 116,000 Present value factor 12% Hint: the present value has been discounted back at 12%, so if it is greater than $100,000 investment, then it is returning a higher than 12% ROI. If it is less than $100,000, then it has an ROI less than 12%. Present Value of cash flow Terry O'Malley just won a lottery worth $900,000. He will collect the money in one of two ways. He has to chose. You are asked to calculate which option is best and give Terry your advice. Assume Terry can earn 8% on the money if he had it now. (hint, that is a good discount rate, use 8%) Option 1) Terry takes the entire $900,000 today, but he will pay an immediate 46% income tax. Option 2) Terry can chose to receive $62,000 equal payments. The first would be received today, and the remaining 19 payments yearly. Terry will be taxed on these payments at a 25% tax rate. A department head wants to buy a $100,000 machine that will cut costs saving the company a lot of money. When pushed, the department head made the following predictions on savings (positive cash flow). You have other investment opportunities, so you will only approve this request if it returns at least 12% return on investment (ROI). End of year one cash savings End of year two cash savings End of year three cash savings End of year Four cash savings No additional savings anticipated in future years. total savings 45,000 28,000 25,000 18,000 116,000 Present value factor 12% Hint: the present value has been discounted back at 12%, so if it is greater than $100,000 investment, then it is returning a higher than 12% ROI. If it is less than $100,000, then it has an ROI less than 12%. Present Value of cash flow Terry O'Malley just won a lottery worth $900,000. He will collect the money in one of two ways. He has to chose. You are asked to calculate which option is best and give Terry your advice. Assume Terry can earn 8% on the money if he had it now. (hint, that is a good discount rate, use 8%) Option 1) Terry takes the entire $900,000 today, but he will pay an immediate 46% income tax. Option 2) Terry can chose to receive $62,000 equal payments. The first would be received today, and the remaining 19 payments yearly. Terry will be taxed on these payments at a 25% tax rate.