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# Accounting : Compute the net present value of each opportunity

Question
16-9
Mr. Bruce Graham saved \$250,000 during the 25years that he worked for a major corporation.
Now he has retired at the age of 50 and has begun to draw a comfortable pension check every
month. He wants to ensure the financial security of his retirement by investing his savings wisely
and is currently considering two investment opportunities. Both investments require an initial
payment of \$187,500. The following table presents the estimated cash inflows for the two
alternatives.
Opportunity #1
Opportunity# 2

Year 1
55,625
102,500

Year 2
58,750
108,750

Year 3
78,750
17,500

Year 4
101,250
15,000

Mr. Graham decides to use his past average return on mutual fund investments as the discount
rate ; it is 8%.
A. Compute the net present value of each opportunity. Which should Mr. Graham adopt based on
the net present value approach?
B. Compute the payback period for each project. Which should Mr. graham adopt based on the
payback approach?
C. Compare the net present value approach with the payback approach. Which method is better
in the given circumstances? Week 5 Additional (Problem 8-2): Basketball player decision
8-2
The Phoenix Kings of the United Basketball League have a moody center by the name of
Orlando Dawkins. Dawkins is under contract with the team and is scheduled to earn \$650,000 in
both 20X3 and 20X4. A \$75,000 salary increase will take effect in 20X5.
Dawkins has not gotten along with several of his teammates and, as a result, management is
exploring the possibility of a trade with the Philadelphia Rockets to acquire George Harper, a star
player. The Kings would pay the Rockets \$350,000 immediately for the trade to take place.
Harper would be paid a \$270,000 signing bonus at the beginning of 20X3 that management plans
to expense over the next 3 years by using straight-line amortization. Harper’s annual salary
would be \$950,000 from 20X3 through 20X5, highest on the team because of his ability to attract
fans. The Kings expect that increased attendance will produce added annual net cash inflows of
\$525,000.
Phoenix officials believe that both players would play 3 more years for the Kings, at which time
they would become free agents and move along to other clubs. The Kings would receive
\$380,000 compensation from the other club for Dawkins; for Harper, the figure would increase
to \$500,000. Regardless of whether the trade takes place, the Kings are obligated to pay Dawkins
\$200,000 at the end of 20X4 under the terms of his original contract.
The Kings desire a rate of return of 14% and use the net present value method to analyze
investments. Round all calculations to the nearest dollar, and ignore income taxes.
Instructions
1.
Determine whether the Kings should keep Dawkins or trade for Harper . Assume the
trade would occur on January 1, 20X3.
2.
Future cash flows are, in many cases, subject to change. List several events that could
occur that might influence the cash flows in this situation.

(Problem 8-3) Straight forward net present value and payback computations
The Calgary Eskimos play in the Canadian Hockey League. Although the Eskimos will soon be
moving to a modern arena, management is studying the possibility of expanding the team’s
present facility to accommodate increased crowds. A \$2.4 million expansion is planned that has a
\$200,000 residual value and will be depreciated by the straight-line method over four seasons.
Number of seats
Occupancy rate
Ticket price
Class 1 seats
2,500
80%
\$6
Class 2 seats
2,000
60
4
The team will play 50 home games each season. Total added operating costs per game (ushers,
cleanup, and depreciation) are expected to average \$11,800. All such costs, except depreciation,
require cash outlays.
Instructions
1.
By using the net present value method and a 16% desired rate of return, determine
whether the expansion should be undertaken.
2.
In addition to the cash flows presented here, what other cash flows might change if the
Eskimos add on to the arena?

Week 5 Assignment 3
Expand your analysis of a topic covered in chapter 10 into a 1 to 2 page APA style paper. Include
your assessment of the topics’ application in managerial accounting. Include examples.
Chapter 10 An Introduction to Managerial accounting
Carefully review the Grading Rubric for the criteria that will be used to evaluate your
assignment.

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