Reference no: EM13333103

P.1

Levi McArthur graduated with a master of accountancy degree and has accepted a staff accounting position with a firm; he will receive a salary of $50,000. The firm guarantees that Levi will receive a 5 to 9 percent raise each year for the next five years depending on his performance.

Questions:

-What will Levi's salary be in five years if he gets a 5 percent raise each year?

-What would his salary be in five years if the annual raise is 9 percent?

P.2

The Grooms Diner has just purchased a counter and stools for $45,000. Nick paid $5,000 down and is going to borrow the remaining $40,000. The Manhattan National Bank will loan him the money for four years if he agrees to make monthly payments.

A. What are the monthly payments if the bank charges 5 percent interest?

B. What are the monthly payments if the bank charges 7 percent interest?

C. What are the monthly payments if the bank charges 9 percent interest?

P.3

**Michael Paul wants to start his own business when he graduates from college in three years and he needs $600,000 to do so.

Question:

How much money must he put aside today under the following conditions?

A. He can earn 8 percent compounded semiannually.

B. He can earn 8 percent compounded annually.

C. He can earn 8 percent compounded quarterly.

P.4

Adams Products, Inc. manufactures a product it sells for $25. Adams sells all of the 24,000 units per year it is capable of producing at the current time, and a marketing study indicates that it could sell 14,000 more units per year. To increase its capacity, Adams must buy a machine that has the capacity to produce 50,000 units of its product annually. The existing equipment can produce the product at a unit cost of $16. Today it has a book value of $80,000 and a market value of $60,000. The new equipment could produce 50,000 units at a unit cost of $12. The new equipment would cost $500,000 and would be depreciated uniformly over its five-year life. If the new machine is purchased, fixed operating costs will decrease by $20,000 per year.

Question:

-If Adams's cost of capital is 18 percent and its tax rate is 30 percent, should Adams buy the new machine?  Why?