## Solve Financial Risk and Capital Budgeting Situations.

1. Tam Co. is negotiating for the purchase of equipment that would cost \$100,000, with the expectation that \$20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is ten years, with no residual value, and it would be depreciated by the straight-line method. Tam’s predetermined minimum desired rate of return is 12%. The present value of an annuity of 1 at 12% for ten periods is 5.65. The present value of 1 due in ten periods at 12% is .322. What is the accrual accounting rate of return based on the initial investment? 2. For the next two years, a lease is estimated to have an operating net cash inflow of \$7,500 per annum, before adjusting for \$5,000 per annum tax basis lease amortization, and a 40% tax rate. The present value of an ordinary annuity of \$1 per year at 10% for two years is 1.74. What is the lease’s after-tax present value using a 10% discount factor? 3. Tam Co. is negotiating for the purchase of equipment that would cost \$100,000, with the expectation that \$20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is ten years, with no residual value, and would be depreciated by the straight-line method. Tam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of 1 at 12% for ten periods is 5.65. Present value of 1 due in ten periods at 12% is .322. In estimating the internal rate of return, the factors in the table of present values of an annuity should be taken from the columns closest to what? 4. Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a \$60,000 market value. An unprotected crop subject to frost has an expected market value of \$40,000. If Cal protects the strawberries against frost, then the market value of the crop is still expected to be \$60,000 under frost-free conditions and \$90,000 if there is a frost. What must be the probability of a frost for Cal to be indifferent to spending \$10,000 for frost protection? 5. Questo borrowed \$100,000 from a bank on a one-year 8% term loan, with interest compounded quarterly. What is the effective annual interest rate on the loan?