PART TWOFinancial ToolsE5-4Your firm has the option of making$130,000 today but will save the company money over several years. You estimatethat the software will provide the savings shown in the following table over its5-year life.an investment in new software that will costYearSavings estimate1$35,000250,000345,000425,00015,000Should the firm make this investment if it requires a minimum annual return of 9%on all investments?Joseph is a friend of yours. He has plenty of money but little financial sense. Hereceived a gift of $12,000 for his recent graduation and is looking for a bank inwhich to deposit the funds. Partners' Savings Bank offers an account with an annualinterest rate of 3 % compounded semiannually, whereas Selwyn's offers an accountwith a 2.75% annual interest rate compounded continuously. Calculate the value ofthe two accounts after 1 year, and recommend to Joseph which account he shouldchoose.E5-5E5-6 Jack and Jill have just had their first child. If they expect that college will cost$150,000 per year in 18 years, how much should the couple begin depositingannuallypay 1 year of tuition 18 years from now? Assume they can earn a 6% annual rateat the end of each of the next 18 years to accumulate enough funds toof return on their investment.XThe MyAll problems are available in MyLab Finproblems in Excel format available in Mdicatesan

Question
Asked Sep 15, 2019

Questions E5-4 and E5-6

PART TWO
Financial Tools
E5-4
Your firm has the option of making
$130,000 today but will save the company money over several years. You estimate
that the software will provide the savings shown in the following table over its
5-year life.
an investment in new software that will cost
Year
Savings estimate
1
$35,000
2
50,000
3
45,000
4
25,000
15,000
Should the firm make this investment if it requires a minimum annual return of 9%
on all investments?
Joseph is a friend of yours. He has plenty of money but little financial sense. He
received a gift of $12,000 for his recent graduation and is looking for a bank in
which to deposit the funds. Partners' Savings Bank offers an account with an annual
interest rate of 3 % compounded semiannually, whereas Selwyn's offers an account
with a 2.75% annual interest rate compounded continuously. Calculate the value of
the two accounts after 1 year, and recommend to Joseph which account he should
choose.
E5-5
E5-6 Jack and Jill have just had their first child. If they expect that college will cost
$150,000 per year in 18 years, how much should the couple begin depositing
annually
pay 1 year of tuition 18 years from now? Assume they can earn a 6% annual rate
at the end of each of the next 18 years to accumulate enough funds to
of return on their investment.
X
The My
All problems are available in MyLab Fin
problems in Excel format available in M
dicates
an
help_outline

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PART TWO Financial Tools E5-4 Your firm has the option of making $130,000 today but will save the company money over several years. You estimate that the software will provide the savings shown in the following table over its 5-year life. an investment in new software that will cost Year Savings estimate 1 $35,000 2 50,000 3 45,000 4 25,000 15,000 Should the firm make this investment if it requires a minimum annual return of 9% on all investments? Joseph is a friend of yours. He has plenty of money but little financial sense. He received a gift of $12,000 for his recent graduation and is looking for a bank in which to deposit the funds. Partners' Savings Bank offers an account with an annual interest rate of 3 % compounded semiannually, whereas Selwyn's offers an account with a 2.75% annual interest rate compounded continuously. Calculate the value of the two accounts after 1 year, and recommend to Joseph which account he should choose. E5-5 E5-6 Jack and Jill have just had their first child. If they expect that college will cost $150,000 per year in 18 years, how much should the couple begin depositing annually pay 1 year of tuition 18 years from now? Assume they can earn a 6% annual rate at the end of each of the next 18 years to accumulate enough funds to of return on their investment. X The My All problems are available in MyLab Fin problems in Excel format available in M dicates an

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Expert Answer

Step 1

Part E5-4:
To make the decision as to whether the firm should make the investment or not we need to use the net present value (NPV) decision rule. According to NPV decision rule, any investment (or project) with a positive NPV should be accepted.

Step 2

We need to calculate the present value of the savings estimates that the software will provide over its 5 year life. If the present value of the cash flows is greater than the present cost, then the investment should be accepted.

Step 3

Using the cash flows and the discount rate of 9%, we determined...

A
B
A
B
1
1
Cash flow
Cash flow
$35,000
2 Year
2 Year
3 1
35000
1
4 2
$50,000
50000
2
5 3
$45,000
45000
5
6 4
$25,000
25000
6
4
7 5
$15,000
15000
7
5
NPV(9%,B3:B7) 8 NPV=
$136,401.95
8 NPV
LC
help_outline

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A B A B 1 1 Cash flow Cash flow $35,000 2 Year 2 Year 3 1 35000 1 4 2 $50,000 50000 2 5 3 $45,000 45000 5 6 4 $25,000 25000 6 4 7 5 $15,000 15000 7 5 NPV(9%,B3:B7) 8 NPV= $136,401.95 8 NPV LC

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