Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 11, Problem 11.6P
a)
Summary Introduction
To determine:
The sunk cost and the
Introduction:
The capital budgeting is the process of making huge investments by the firms to make their capital assets grow faster such as the building of new buildings, purchase of advanced costly machineries etc.
The cost that is already made by the firm and cannot be recaptured is the sunk cost.
The opportunity cost is value of the next best alternative that the firm foregoes when making an investment decision.
b)
Summary Introduction
To determine: The sunk cost and the Opportunity cost classification of the costs.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
USING PRESENT WORTH ANALYSIS AND SHOWING ALL STEPS PARTI A middle age couple has made an agreement with Landscape Forever Company, a gravesite landscaping and
maintenance firm. The agreement states that the company will provide "deluxe" maintenance for the couples selected gravesite forever for an annual fee of $1000. To arrange payment the
couple has set up a variable rate perpetual trust fund with their bank. The bank guarantees that the trust fund will earn a minimum of 5% per year. Assume that the services of Landscape Forever
will not be needed until one of them die, and that they live until the age of 100. What is the minimum amount of money that the couple would have to deposit into the trust fund (ANSWER PART
I is 20000 (P/F, 5%, 49) PART II Suppose that the couple made this minimum deposit at the age of 50, and suppose that the that interest rate changes as follows. Age 50 - 54 5% Age
55-64 10% Age 65-74 15% Age 75 - 84 20% What is the largest sum of money they can withdraw at…
Maintenance money for a new building has been sought Mr. Kendall would like to make a donation to cover all future expected maintenance costs for the building. These maintenance costs are expected to be P43322 each year for the first 5 years, P53709 each year for year 6 through 10 and P64659 each year for year 11 through 15. If money is placed in account that will pay 12% interest compounded semi-annually, how large should the gift be?
INCLUDE THE CASH FLOW DIAGRAM OF THIS PROBLEM AND ROUND OFF INTEREST RATE TO 5 DECIMAL PLACES AND YOUR FINAL ANSWER TO 2 DECIMAL PLACES.
Mr. Russ T. Steele sels his old vehicle for $5000 (you get more if you private sale!) and pays cash for a used (but newer vehicle) that
costs $10.000. He also understands that he needs to allow for maintenance and operation costs of his vehicle. He estimates that these
costs will be approximately $2000 a year and estimates that the costs will increase by $100 per year. He hopes to keep the vehicle for
five years and then sell it for an estimated value of $2000. Mr. Steele has an MARR of 8%. The equivalent annual cost of the cash flow
associated with his purchase is most nearly:
$-1,850
$-3,100
$3,000
$3,800
Chapter 11 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 11.1 - Prob. 11.1RQCh. 11.1 - What three types of net cash flows may exist for a...Ch. 11.1 - Prob. 11.3RQCh. 11.1 - Prob. 11.4RQCh. 11.2 - Explain how to use each of the following inputs to...Ch. 11.2 - How do you calculate the book value of an asset?Ch. 11.2 - Prob. 11.7RQCh. 11.2 - Prob. 11.8RQCh. 11.3 - Prob. 11.9RQCh. 11.3 - Prob. 11.10RQ
Ch. 11.4 - Explain how the terminal cash flow is calculated...Ch. 11 - Book value, taxes, and initial investment Irvin...Ch. 11 - If Halley Industries reimburses employees who earn...Ch. 11 - Iridium Corp. has spent 3.5 billion over the past...Ch. 11 - Prob. 11.3WUECh. 11 - Prob. 11.4WUECh. 11 - Prob. 11.5WUECh. 11 - Prob. 11.1PCh. 11 - Net cash flow and time line depiction For each of...Ch. 11 - Replacement versus expansion cash flows Tesla...Ch. 11 - Sunk costs and opportunity costs Masters Golf...Ch. 11 - Prob. 11.5PCh. 11 - Prob. 11.6PCh. 11 - Prob. 11.7PCh. 11 - Book value and taxes on sale of assets Troy...Ch. 11 - Prob. 11.9PCh. 11 - Prob. 11.10PCh. 11 - Calculating initial investment Vastine Medical...Ch. 11 - Prob. 11.12PCh. 11 - Prob. 11.13PCh. 11 - Prob. 11.14PCh. 11 - Prob. 11.15PCh. 11 - Prob. 11.16PCh. 11 - Prob. 11.17PCh. 11 - Prob. 11.18PCh. 11 - Prob. 11.19PCh. 11 - Prob. 11.20PCh. 11 - Prob. 11.21PCh. 11 - Prob. 11.22PCh. 11 - Net cash flows for a marketing campaign Marcus...Ch. 11 - Net cash flows: No terminal value Central Laundry...Ch. 11 - Prob. 11.25PCh. 11 - Ethics Problem Cash flow projections are a central...
Knowledge Booster
Similar questions
- finance Micah is going to buy a rental house to begin building his real estate wealth. He is not sure how much to pay for the property because it needs work. He surveys the area and find that a home in good condition sells for $225,000 and rents are $1250 per month. He will spend the first year spending $35,000 on remodeling and receive no rent. In the second year he will begin collecting rent and will also install a new HVAC system for $18,000. He will sell the home in five years for the current full market value. Micah wants a 15% annual return on his money to take this risk and go to all the trouble. HOW MUCH SHOULD MICAH PAY FOR THE HOME? (Answer in dollars). (Hint: Use the following format in a financial calculator or Excel. Fill in the Cash Flows (CF). Cash Flow 0 (CF0) = 0. Use 0 because we do not know how much he should pay up front for the home. Stating CF0 may not be necessary in Excel. CF1= CF2= CF3= CF4= CF5= i= NPV=___________________arrow_forwardUncle Ben saved $800.000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and has begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $600.000. The following table presents the estimated cash inflows for the two alternatives. Year 1 Year 2 Year 3 Year 4 Opportunity # 1 $178,000 $188,000 $252,000 $324,000 Opportunity # 2 328,000 348,000 56,000 48,000 Uncle Ben decides to use his past average return on mutual fund investments as the discount rate; it is 8 percent. Find: Payback Period Modified Payback Period Net Present Value Profitability Index Accounting Rate of Return Internal Rate of Returnarrow_forwardUncle Ben saved $800.000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and has begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $600.000. The following table presents the estimated cash inflows for the two alternatives. Year 1 Year 2 Year 3 Year 4 Opportunity # 1 $178,000 $188,000 $252,000 $324,000 Opportunity # 2 328,000 348,000 56,000 48,000 Uncle Ben decides to use his past average return on mutual fund investments as the discount rate; it is 8 percent. Answer this question: Compute for the Net Present Value of opportunity #1. Compute for the Profitability Index of opportunity #1 Compute for the Net Present Value of opportunity #2 Compute for the Profitability Index of opportunity…arrow_forward
- Saul Cervantes has just purchased some equipment for his landscaping business. For this equipment, he must pay the following amounts at the end of each of the next five years: $10, 450, $ 8, 500, $9,675, $12, 500, and $11, 635. If the appropriate discount rate is 10.875 percent, what is the cost in today's dollars of the equipment Saul purchased today? Please show the excel equationarrow_forwardLinda just graduated from college. Since she is starting her own business, it’s time to upgrade from her clunker to a reliable vehicle. Linda has the option to purchase a new car for her business at a cost of $31,416 (life of 7 years with no salvage value), estimating that it would help her bring in additional annual net operating cash flows of $7,700 over the life of the car.Determine the simple payback period and the IRR for this investment. Linda expects her business income to be subject to a 30% tax rate. (Round simple payback period to 3 decimal places, e.g. 15.256 and IRR to 2 decimal places, e.g. 15.25%. Round intermediate calculations to 2 decimal places, e.g. 15.25.) Simple payback period enter a number of years rounded to 3 decimal places years IRR enter percentages rounded to 2 decimal places %arrow_forwardUncle Ben saved $800,000 during the 25 years that he worked for a major corporation. Now he has retired at the age of 50 and has begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by investing his savings wisely and is currently considering two investment opportunities. Both investments require an initial payment of $600,000. The following table presents the estimated cash inflows for the two alternatives. Year 1 Year 2 Year 3 Year 4 Opportunity # 1 $178,000 $188,000 $252,000 $324,000 Opportunity # 2 328,000 348,000 56,000 48,000 Uncle Ben decides to use his past average return on mutual fund investments as the discount rate; it is 8 percent. Answer the questions: 1. Compute for the Accounting Rate of Return of opportunity #1. 2. Compute for the Accounting Rate of Return of opportunity #2. 3. Compute for the Internal Rate of Return of opportunity #1. 4. Compute for the Internal Rate of Return of opportunity #2.arrow_forward
- I. A house owner decided to renovate his property in 7 years where he will be paying 50,000 for the renovation. To prepare for this amount, he set four equal annual payments now. No further payments are made after 4 years. If money is worth 12% per annum, what annual payment is necessary? Show Cash Flow Diagram II. As a member, Mr. Dela Cruz will deposit P300 with a savings and loan organization at the beginning of each 3 months for 12 years. If the organization pays interest at the rate of 1.4.% per 3 months. Find the sum to his credit just after the last deposit. Show Cash Flow Diagramarrow_forwardDirections: Answer the following questions. Provide necessary computations. 1. The Madrigal family is experiencing some financial pressures, even though the couple has a combined income of P1,236,000 per annum. Their home loan will start this year and their eldest daughter, Julieta, will start college in only three years. Alma is contemplating saving for this coming year and told her husband, Pedro, to plan for an emergency fund. Alma's monthly salary is P29,000. a) How much should be the three-month emergency funds of Alma? b) How much should be the three-month emergency funds of Pedro? c) If the couple decided to have five-month emergency funds, how much should be their combined emergency funds?arrow_forwardCreating an endowment Personal Finance Problem On completion of her introductory finance course, Marla Lee was so pleased with the amount of useful and interesting knowledge she gained that she convinced her parents, who were wealthy alumni of the university she was attending, to create an endowment. The endowment will provide for three students from low-income families to take the introductory finance course each year in perpetuity. The cost of taking the finance course this year is $500 per student (or $1.500 for 3 students), but that cost will grow by 2.1% per year forever. Marla's parents will create the endowment by making a single payment to the university today. The university expects to earn 8% per year on these funds. a. What will it cost 3 students to take the finance class next year? b. How much will Marla's parents have to give the university today to fund the endowment if it starts paying out cash flow next year? c. What amount would be needed to fund the endowment if the…arrow_forward
- Each of the following scenarios is independent. All cash flows are after-tax cash flows. Required: 1. Michael Kimathi has purchased a tractor for $87,500. He expects to receive a net cash flow of $33,000 per year from the investment. What is the payback period for Michael? Round your answer to two decimal places. 2.65 years 2. Bertha Lafferty invested $362,500 in a laundromat. The facility has a 10-year life expectancy with no expected salvage value. The laundromat will produce a net cash flow of $109,000 per year. What is the accounting rate of return? Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box). 30 X % 3. Melannie Bayless has purchased a business building for $322,000. She expects to receive the following cash flows over a 10-year period: Year 1: $44,500 Year 2: $62,000 Year 3-10: $81,400 What is the payback period for Melannie? Round your answer to one decimal place. 4.6 years What is the accounting rate of return?…arrow_forwardA civil engineer plans to own a 300 m² lot after 5 years for an estimated cost of 570,000. To accumulate this amount, he will make equal year-end deposits in a fund earning 12% compounded annually. However, at the end of the 2nd year, he married his girlfriend and decided to build a 250,000 worth house on the lot he is planning to buy. What should be his annual deposits for the last 3 yearsarrow_forwardYour answer is partially correct. Sarah just graduated from college. Since she is starting her own business, it's time to upgrade from her clunker to a reliable vehicle. Sarah has the option to purchase a new car for her business at a cost of $23,232 (life of 7 years with no salvage value), estimating that it would help her bring in additional annual net operating cash flows of $9,600 over the life of the car. Determine the simple payback period and the IRR for this investment. Sarah expects her business income to be subject to a 30% tax rate. (Round simple payback period to 3 decimal places, e.g. 15.256 and IRR to 2 decimal places, e.g. 15.25%. Round intermediate calculations to 2 decimal places, e.g. 15.25.) Simple payback period IRR 2.420 years 36.69 %arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage LearningIndividual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT
Pfin (with Mindtap, 1 Term Printed Access Card) (...
Finance
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Cengage Learning
Individual Income Taxes
Accounting
ISBN:9780357109731
Author:Hoffman
Publisher:CENGAGE LEARNING - CONSIGNMENT