1. In the context of present value analysis, what is the discount rate? How does the discount rate affect the present value calculation? If the present value of a future return is calculated using a discount rate of 8%, what can we expect the present value analysis to reveal if the discount rate is changed to 10%? What if the discount rate is changed to 6%?
2. Homemade Bread Company is considering building a new production facility that will cost $46,500. The expected cash inflow from this new facility is estimated to be $4,600 per year. Calculate the payback period for this investment. What does the payback period calculation not tell Homemade Bread Company that it needs to know?
3. ABC Company is considering an investment in a machine that will have a useful life of six years with a salvage value at the end of $12,000.Assuming that ABC has a minimum rate of return of 12%, what is the present value of that salvage value?
4. The Donut Shoppe is considering buying a new donut machine for a total of $110,110. The Donut Shoppe estimates that this new machine will increase its cash inflow each year, after expenses, by $22,000. This machine will have a useful life of 10 years and will have no salvage value. Ignoring the effects of taxes, what is the machine's internal rate of return, calculated to the nearest whole percentage?