Reference no: EM132418652

1. Terex, a large road construction firm that operates in three provinces, is considering the purchase of ten newly designed, heavy-duty road graders to replace its current fleet. One of the advantages of these new road graders is their increased stability, which Terex believes will cut in half the frequency with which graders roll over, injuring or killing operators. Such injuries and fatalities have proved a significant loss exposure for Terex. Additional advantages of these new graders are that they are more fuel-efficient and productive than the graders Terex is now using.

The new graders, which Terex can purchase for $40,000 each, can be expected to have a useful life of seven years, with no salvage value. If Terex management wishes to earn an annual after tax, time adjusted rate of return of at least 16% on its funds, compute the minimum after-tax cash flow that each grader would have to generate to attain this rate of return. (For 16%, 7 years, the present value factor is 4.039).

2. The present value of $1.00 to be received five years hence is $0.681 at 8 percent interest per year compounded annually. The present value of $1.00 to be received at the end of each of the next five years is $3.993 if the interest rate is 8 percent per year compounded annually. Refer to Tables on pages 10.10 and10.14 to confirm the above statement.

At 8 percent interest per year, compounded annually, compute 

a. The present value of $100 to be received (24) twenty-four months from now;

b. The present value of $60 to be received at the end of each of the next (7) seven years;

c. The combined present value of $50 to be received (1) one year hence; $38 (2) two years hence; and $100 (5) five years hence, with no money being received in the third and fourth years.