On January 2, 20X1, Bruce Greene invested $10,000 in the stock market and purchased 500 shares of Heartland Development, Inc. Heartland paid cash dividends of $2.60 per share in 20X1 and 20X2; the dividend was raised to $3.10 per share in 20X3. On December 31, 20X3, Greene sold his holdings and generated proceeds of $13,000. Greene uses the net-present- value method and desires a 16% return on investments. Prepare a chronological list of the investment’s cash flows. Greene is entitled to the 20X3 dividend. Compute the investment’s net present value, rounding calculations to the nearest dollar. Given the results of part (b), should Greene have acquired the Heartland stock? Briefly explain. STL Entertainment is considering the acquisition of a sight-seeing boat for summer tours along the Mississippi River. The following information is available: All operating costs, except depreciation, require cash outlays. On the basis of similar operations in other parts of the country, management anticipates that each trip will be sold out and that 120,000 passengers will be carried each season. Ignore income taxes. By using the net-present-value method, determine whether STL Entertainment should acquire the
boat. Assume a 14% desired return on all investments- round calculations to the nearest dollar. Columbia Enterprises is studying the replacement of some equipment that originally cost $74,000. The equipment is expected to provide six more years of service if $8,700 of major repairs are performed in two years. Annual cash operating costs total $27,200. Columbia can sell the equipment now for $36,000; the estimated residual value in six years is $5,000. New equipment is available that will reduce annual cash operating costs to $21,000. The equipment costs $103,000, has a service life of six years, and has an estimated residual value of $13,000. Company sales will total $430,000 per year with either the existing or the new equipment. Columbia has a minimum desired return of 12% and depreciates all equipment by the straight-line method. By using the net-present-value method, determine whether Columbia should keep its present equipment or acquire the new equipment. Round all calculations to the nearest dollar, and ignore income taxes. Columbia’s management feels that the time value of money should be considered in all long-term decisions. Briefly discuss the rationale that underlies management’s belief.