1) Dooney and Burke, is considering an investment in computer
and network equipment costing $254,000. This equipment would allow
them to offer new programming services to clients. The equipment
will be depreciated on the straight line basis over an eight year
period with an estimated residual value of $60,000. Using the
accounting rate of return model, what is the minimum average annual
operating income that must be generated from this investment in
order to achieve 11% accounting rate of return?
2) When you graduated from college, your mother plans to give
you a gift of $50,000 to start you on your way. However, to
determine what you learned in business school, your mother presents
you with four options on how to received the gift. Which of the
options presented by your mother will yield the greatest present
value to you?
a) a lump sum of $50,000 after grad school (2 years) assuming a
3% discount rate?
b) a lump sum of $50,000 today
c) a lump sum of $50,000 after grad school (2 years) assuming a
5% discount rate
d) $25,000 per year for the next 2 years using a 3% discount
rate
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