Solution -Three Years Ago, Astro Masters, Inc Based on Your Calculations of Total Cash Flows, Which of Outflow

question 93

Multiple Choice

Solution:
$\begin{array}{llll}&\text { Cash Inflows } & \text { Cash Outflow } & \text { Future } & \text { Total } \\&\text { From Sale } & \text { for Replacement } & \text { Cash Flows } & \text { Cash Flows } \\\hline\text { Asset C: }\\\text { Option } 3&3,500&(4,000) &6,000&5,500\end{array}$
-Three years ago, Astro Masters, Inc. purchased the three assets listed in the following table. The chief financial officer, Bill Moss, is presently trying to decide what to do with each asset. He has three options for each asset: (1) sell it; (2) keep it; and (3) sell it and replace it with an equivalent asset. The following information is provided to aid his decision.
$\begin{array}{|c|c|c|c|c|c|}\hline \text { Asset } & \begin{array}{c}\text { Original } \\\text { Cost }\end{array} & \begin{array}{c}\text { Replacement } \\\text { Cost }\end{array} & \begin{array}{c}\text { Fair }\\\text { Market } \\\text { Value }\end{array} & \begin{array}{c}\text { PresentValue of Future } \\\text { Cash Flows Produced } \\\text { by Old Asset }\end{array} & \begin{array}{c}\text { Present Value of } \\\text { Future Cash Flows } \\\text { of Equivalent Asset }\end{array} \\\hline \mathrm{A} & \$ 4,500 & \$ 1,500 & \$ 2,000 & \$ 3,000 & \$ 5,000 \\\hline \mathrm{B} & \$ 2,000 & \$ 2,500 & \$ 1,000 & \$ 3,000 & \$ 4,500 \\\hline \mathrm{C} & \$ 2,500 & \$ 4,000 & \$ 3,500 & \$ 3,000 & \$ 6,000 \\\hline\end{array}$
Based on your calculations of total cash flows, which of the following options is the best for Bill to pursue with respect to Asset B?

• A)Option 1
• B)Option 2
• C)Option 3
• D)Both Options 2 & 3 provide the same total cash flows.

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Definitions:

Impression Management

The process by which individuals attempt to control the impressions others form of them, especially in social or organizational settings.

Perceptual Errors

Mistakes in judgment or interpretation caused by inaccuracies in the perception of sensory information.

Self-Fulfilling Prophecy

The way a person behaves based on pre-existing expectations about another person or situation so as to create an outcome that is aligned with those expectations.

Impression Management

The process by which individuals attempt to control the perceptions others have of them.