NPV

Lasik Vision Inc. recently analyzed the project whose cash flows are shown below. However, before Lasik decided to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm’s WACC. The Fed’s action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project’s forecasted NPV? Note that a project’s projected NPV can be negative, in which case it should be rejected.

Old WACC: 8.00%    New WACC: 11.25%

Year       0        1       2       3
Cash flows -\$1,000 \$410 \$410 \$410

 -\$56.60 -\$50.61 -\$59.02 -\$48.04

NPV

NPV unequal

lives. Singing Fish Fine Foods has \$1,990,000 for capital investments this year and is considering two potential projects for the funds. Project 1 is updating the​ store’s deli section for additional food service. The estimated​ after-tax cash flow of this project is ​\$590,000 per year for the next five years. Project 2 is updating the​ store’s wine section. The estimated annual​ after-tax cash flow for this project is ​\$500,000 for the next six years. If the appropriate discount rate for the deli expansion is 9.4​% and the appropriate discount rate for the wine section is 9.0​%,

If the appropriate discount rate for the deli expansion is

9.4​%, what is the NPV of the deli​ expansion?

NPV

Homework

Bell Manufacturing Inc. is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration. The relevant cash flows associated with each are shown in the following table. The firm’s cost of capital is 15%.

 Machine A Machine B Machine C Initial Investment 85,000 \$ 60,000 \$ 130,000 \$ Year Cash Inflows 1 18,000 \$ 12,000 \$ 50,000 \$ 2 18,000 14,000 30,000 3 18,000 16,000 20,000 4 18,000 18,000 20,000 5 18,000 20,000 20,000 6 18,000 25,000 30,000 7 18,000 —– 40,000 8 18,000 —– 50,000

1. Calculate the net present value (NPV) of each press.
2. Using NPV, evaluate the acceptability of each press.
3. Rank the presses from best to worst using NPV.
4. Calculate the profitability index (PI) for each press.
5. Rank the presses from best to worst using PI.

NPV

Martinez Company has money available for investment and is considering two projects each costing \$70,000. Each project has a useful life of 3 years and no salvage value. The investment cash flows follow:
Project A Project B
Year 1 \$ 8,000 \$28,000
Year 2 24,000 28,000
Year 3 52,000 28,000

Instructions
If 8% is an acceptable earnings rate, which project should be selected? Justify your response.

4. Guong Co. has three product lines in its retail stores: books, videos, and music. Results of the fourth quarter are presented below: (25 points)
Books Music Videos Total
Units sold 1,000 2,000 2,000 5,000
Revenue \$22,000 \$40,000 \$23,000 \$85,000
Variable departmental costs 17,000 22,000 12,000 51,000
Direct fixed costs 1,000 3,000 2,000 6,000
Allocated fixed costs 7,000 7,000 7,000 21,000
Net income (loss) \$ (3,000) \$ 8,000 \$ 2,000 \$ 7,000

The allocated fixed costs are unavoidable. Demand of individual products are not affected by changes in other product lines.

Instructions
What will happen to profits if Guong Co. discontinues the Books product line?

NPV

If anyone can offer any type of significant help to me, or better yet get me on the right track, I would greatly appreciate it!

I’ve enclosed my problem down below and additional details are in the excel document. I’m having a hard time distinguishing what is meant by internal funds and if the numbers I’m obtaining are correct as well as if i’m on the right track. I’m also not sure what I should include in the costs when obtaining the answer for part 1 before subtracting depreciation. Thank you!

————–
Problem 1
1) A large manufacturing firm is approached by an equipment supplier for a machine that will replace labor. The machine is expected to last 12 years and is expected to have no salvage value. The firm is in the 30% tax bracket. The firm will depreciate the machine over the 12 year period using straight line method. The details are:
Cost of the machine\$10 million
Maintenance
The machine will require maintenance of \$50,000 in the first year. The maintenance costs will increase at 3% for the first 5 and 10% for the remaining 6 years. The costs are incurred at the end of the year.
Benefits:
1) Labor saving 4 workers will not be required. Assume that each worker costs the firm \$100,000 in the first year. The cost of each worker to the firm increases at 4% per year. All benefits start at the end of the first year of machine.
2) Raw Material saving
The machine will result in a more efficient recovery of metal that could be sold. Saving on raw material is 1 million pounds a year. The metal could be sold for \$0.80 a pound at the end of first year with prices expected to increase at 5% per year.
3) Utility savings
The machine will result in saving of \$100,000 in the first year. Utility prices are expected to increase at 5% every year.
4) Miscellaneous savings
Miscellaneous savings are \$200,000 in the first year. These savings are expected to increase at 3% every year.
1) What is the NPV of the machine using internal funds? The firm estimates that projects of similar risk return 10% per year. Suppose after you have done the calculations, the finance manager of the firm tells you that he made a mistake in estimating returns from projects of similar risk and that the true return from projects of similar risk as the machine is 10.5%. What is the new NPV? – (2+0.5 points)
2) What is the NPV of the machine using debt financing? In this case, the firm will have to issue bonds paying annual coupon at the rate of 10%. The bonds will have the same maturity as the life of the machine. – (2.5 points)
3) Finally, the firm can lease the machine. The equipment manufacturer is willing to lease the machine for payments of \$1,500,000 a year for 12 years. After 12 years the machine will remain with the firm, but it is expected to have no value at that time. What is the NPV of the leasing alternative? For this part, you have to do the following:
a) If the firm leases the machine, how will the lease be categorized as – capital (financial) or an operating lease? Why? – (1 point)
b) What is the NPV of the project if the firm decides to lease the machine? – (3 points)
4) As the decision maker, will you acquire this machine? If yes, which financing arrangement will you choose? – (1 point).
You can use the following templates to answer the questions. I expect that all of us will use excel to answer the questions.
1) Benefits
-Costs
-Depreciation
____________
EBT
-Taxes
____________
NI
+Depreciation
____________
CFO
2) Benefits
-Costs
-Depreciation
____________
EBIT
-Interest
____________
EBT
-Taxes
____________
NI
+Depreciation
____________
CFO
3) Each lease payment=principal payment+interest payment
Benefits
-Costs
-Depreciation
____________
EBIT
-Interest portion of lease payments
____________
EBT
-Taxes
____________
NI
-Principal portion of lease payments
+Depreciation
____________
CFO

NPV

Your division is considering two projects with the following net cash flow (in millions):

Year 0 Year 1 Year 2 Year 3
Project A -\$25 \$5 \$10 \$17
Project B -\$20 \$10 \$9 \$6

a. What are the projects’ NPVs, assuming the WACC is 5 percent? 10 percent? 15 percent?
b. What are the projects’ IRRs at each of these WACCs?
c. If the WACC is 5 percent and A and B were mutually exclusive, which would you choose? what if the WACC were 10 percent? 15 percent? (Hint: the crossover rate is 7.81 percent)

NPV

Discuss how NPV is calculated and state the decision rule.

NPV

A proposed project should be accepted if the net present value is

a. positive.

b. negative.

c. larger than the internal rate of return.

d. smaller than the internal rate of return.

NPV

Your division is considering two projects with the following net cash flows:

year Project A Project B
0 (25) (20)
1 5 10
2 10 9
3 17 6

a) What are the projects’ NPVs, assuming the WACC is 5 percent? 10 percent? 15 percent?
b) What are the project’ IRRs each of these WACCs?
c) If the WACC were 5 percent and A and B were mutually exclusive, which would you choose? What if the WACC were 10 percent? 15 percent?

NPV

Which of the following statements is correct?

a. In a capital budgeting analysis where part of the funds used to finance the project are raised as debt, failure to include interest expense as a cost in the cash flow statement when determining the project’s cash flows will lead to an upward bias in the NPV.
b. The preceding statement would be true if “upward” were replaced with “downward.”
c. The existence of “externalities” reduces the NPV to a level below the value that would exist in the absence of externalities.
d. If one of the assets that would be used by a potential project is already owned by the firm, and if that asset could be leased to another firm if the project is not undertaken, then the net rent that could be obtained should be charged as a cost to the project under consideration.
e. The rent referred to in statement d is a sunk cost, and as such it should be ignored.

NPV

Solitaire Company is planning to purchase a computer server for \$400,000 to handle purchase orders from the Internet. Installation for this computer server costs \$8,500. It’s initial cost, operating costs, income, and salvage value are represented in the following cash flow diagram:

(see attachment for diagram)
This computer server qualifies for 3-year MACRS depreciation (Yr1: 33.33%, Yr2: 44.45%, Yr3: 14.81%, Yr4: 7.41%) and an investment tax credit of 40% in year 1. The company is in the 35% tax bracket. A working capital infusion of \$100,000 will be required, and is recovered in the final year of the project. Use an after tax MARR of 15%. Assume that the company has net income from other projects.

a) Find the annual depreciation expense and accumulated depreciation for the server.
Hint: Initial investment includes initial cost plus installation costs.
b) Prepare an after-tax analysis and calculate the after-tax NPV.
c) Should the investment be undertaken? Why?

(See attachment for full question).

NPV

1) The Great Computer Company, a U.S. corporation, has a subsidiary in the Netherlands. It is deciding whether to invest \$2 million of its (the parent’s) funds in a 3 year project in the Netherlands.
The after-tax cash flows to the subsidiary are estimated to be as follows (in euros).

Year 1 ?500,000
Year 2 800,000
Year 3 900,000

The entire cash flows of the subsidiary are remitted to the parent annually. There is no additional tax (nor credit) in the parent country.
The exchange rate today is ?1/\$1.20. The exchange rate forecast for the next 3 years is the following:

Year 1 ?1/\$1.15
Year 2 ?1/\$1.10
Year 3 ?1/\$1.05

The cost of capital for both the parent and the subsidiary is 13 percent.
a. What is the NPV of this project to the Netherlands’ subsidiary?
b. What is the NPV of this project to the U.S. parent?
c. Should the project be accepted?

NPV

1. – Colgate Distributing Company has the option to provide to its sales representatives a car or reimburse them the mileage for the use of its own cars. If the company provides the car, it will pay all the expenses related to it, including gas for business travels. The estimations are as follow:
Car cost \$15,000
Depreciation: Straight line over a period of four years (assuming that there is no surrender value)
Estimated car sale value at the end of four years: \$2,500
Annual operation estimated cost:
Gas \$900
Parking \$300
Maintenance
Year 1 \$250
Year 2 \$350
Year 3 \$450
Year 4 \$600
If sales representatives use their own cars, the company will reimburse them \$0.35 cents per mile, company estimates that each representative will drive 18,000 miles per year in business travels. The company cost of capital is 10%, and the rate income tax is 40%. Should the company acquire cars for its sales representatives or should the company reimburse for mileage traveled? Use the NPV method in your calculations.

NPV

Look back to the cash flows for projects F and G in Section 5 (page 112; also below). The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the forecast for each cash flow from each project should be reduced by 8%. But a lazy financial manager, unwilling to take the time to argue with the project’s sponsors, instructs them to use a discount rate of 18%.
a. What are the projects’ true NPVs?

b. What are the NPVs at the 18% discount rate?

c. Are there any circumstances in which the 18% discount rate would give the correct NPVs? (Hint: Could upward bias be more severe for more-distant cash flows?)

C0 C1 C2 C3 C\$ C5
F -9,000 6,000 5,000 4,000 0 0
G -9,000 1,800 1,800 1,800 1,800 1,800

A. Formula Calculation TIP: Use POWER function to calculate (1+r)^t
NPV-Project F T C

NPV-Project G T C

B.
NPV-Project F T C

NPV-Project G T C

C.
T

NPV

In order to expand its business, Auto Parts Distributing, Inc., is considering the purchase of 10 pickup trucks at a total cost of \$150,000. The company expects to keep these trucks for four years, then sell them. The company expects these trucks to generate a pretax net cash flow of \$75,000 in year 1, \$70,000 in year 2, \$65,000 in year 3, \$60,000 in year 4, and to sell after four years for a total price of \$30,000 fully taxable. The company’s marginal tax rate is 40% and its cost of capital is 7.5%. Calculate the net present value of the transaction

NPV

10. A project has an initial investment of \$25,000, with \$6,500 annual inflows for each of the subsequent 5 years. If the required return is 12%, what is the NPV?

a. -\$6,500.00
b. -\$2,447.02
c. -\$1,568.95
d. \$ 215.46
e. \$1,763.81

NPV

What is the net present value of a project that contributes \$25,000 at the end of the first year and \$12,000 at the end of the second year? The initial cost is \$33,000. The appropriate interest rate is 7% for the first year and 10% for the second year.

\$ 281.85
\$ 559.90
\$1,579.44
\$-2,148.26

NPV

General Electric is considering the investment in a capital project. The initial cost in year 0 is \$100,000 to be depreciated straight line over 5 years to an expected salvage value of \$5,000. The firm?s tax rate is 35% and it has an 11% cost of capital. For this project an additional investment in working capital of \$8,000 is required and it will be recovered at the end of the project?s life. The project will generate additional revenues of \$45,000 in year 1 and these revenues will grow annually at a rate of 6%. The additional expenses of the project will be \$15,000 in year 1 and will grow annually at 5%.
a. Prepare a table determining the after-tax net cash flows for this project for years 0 thru 5. Show all work.
b. Determine the NPV for this project. Show all work.

NPV

You have estimated 3 possible NPV outcomes for an investment under analysis, the expected NPV, the best case NPV and the worst case NPV. You have also gotten estimates from management on the probability of each of these three cases. What do you need to do to find the expected NPV for the investment?

NPV

What is the NPV of a project that is expected to pay \$10,000 a year for 7 years if the initial investment is \$40,000 and the required return is 15%?

NPV

1. Edmondson Electric Systems is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that if a project’s projected NPV is negative, it should be rejected.

WACC: 10.00%
Year: 0
Cash flows:-\$1,000

WACC: 10.00%

Year: 0 1 2 3

Cash flows: -\$1,000 \$500 \$500 \$500

a. \$243.43
b. \$255.60
c. \$268.38
d. \$281.80
e. \$295.89

NPV

Sorenson Stores is considering a project that has the following cash flows:

Year Cash Flow
0 CF0 = ?
1 \$2,000
2 3,000
3 3,000
4 1,500

The project has a payback of 2.5 years, and the firm’s cost of capital is 12%. What is the project’s NPV?

a. \$577.68
b. \$765.91
c. \$1,049.80
d. \$2,761.32
e. \$3,765.91

NPV

Can you help me get started on this assignment?

Chapter 9: Net Present Value and Other Investment Criteria
1. An investment project requires an initial investment of \$400 and produces a cash inflow of \$460 in 1 year. The internal rate of return (IRR) on this project is 15%. If the cost of capital is 10%, then the NPV of the project is
A) greater than zero
B) less than zero
C) equal to zero

2. Consider a project with an initial investment and positive future cash flows. As the discount rate is decreased,
a. the IRR remains constant while the NPV increases.
b. the IRR decreases while the NPV remains constant.
c. the IRR remains constant while the NPV decreases.
d. the IRR increases while the NPV remains constant.
e. the IRR decreases while the NPV increases.

3. You are presented with the following information on two mutually exclusive projects.
Period: 0 1 2 3 IRR NPV 23.4% \$3.498 9
Period 0 1 2 3 IRR NPV
Project A -50 +25 +25 +25 23.4% \$3.498
Project B -20 +11.5 +11.5 +11.5 33.1% \$4.609

If we use NPV as the decision rule:
a. Accept project A and B
b. Reject project A, and B
c. Reject project A and B
d. Reject project A, Accept B
e. Accept project A, Reject B

4. An investment has a cost of \$20M. Given the following cash flow estimates, calculate the projects payback period (we assume CF’s occur throughout the year).
Year Cash Flow
1 \$10
2 \$15
3 \$30
a. 1.8 years
b. 2.0 years
c. 1.67 years
d. 1.96 years
e. 2.40 years

5. The Ford Motor Company selects projects based on one criterion, whether projects increase the dollar value of the firm. Which of the following criteria does Ford use in its analysis?
a. internal rate of return
b. payback period
c. net present value
d. average accounting return
e. profitability index

6. Which of the following statements is false with regard to estimating cash flows for capital budgeting purposes?
a. Cash flows should be measured on an after tax basis.
b. Financing costs should be incorporated into the estimation of cash flows.
c. Cash flows should be estimated on an incremental basis.
d. Cash flows must incorporate depreciation, even though depreciation is a non-cash expense.

7. What is the IRR of an investment that costs \$77,500 and pays \$27,500 a year for 5 years:
a. 22.75%
b. 16.54%
c. 20.00%
d. 22.49%
e. 23.56%

8. A project with conventional cash flows has an NPV of \$300. The cost of capital for this project is 15%. Intuitively, which of the following could be the IRR for this project?
a. 10%
b. 12%
c. 13.5%
d. 17.0%
e. cannot be determined

Q 9-11: Your best friend graduated from UMKC five years ago, and after paying back student loans, she finally has some money to invest. There are two investment opportunities that her dad has told her about, and you are trying to help her decide between the two. Investment A requires her to invest \$2,000 today, and investment B requires \$3,500. The cash flows for these two investments are likely to be as follows:

Year Investment A Investment B
1 0 600
2 750 800
3 750 800
4 750 1,000
5 250 1,000
6 250 2,000

9. What are the payback periods for Investments A and B (we assume CF’s occur throughout the year)?

10. If you require a rate of return of 15%, what is the NPV of each investment?

11. Which project would you choose? Why?

Q 12-16: Due to increasing demand for amusement parks in Missouri, Mr. Entrepreneur is choosing between two projects to build an amusement park in lower Missouri. The initial outlay for the theme park planned in Lake Ozark is \$50 million, while for the Flushing amusement park, the initial outlay is \$100 million. The cost of capital is 10 percent. After-tax cash flows (in millions of dollars) for each project are as follows:

Year Lake Fenton Flushing
1 25 35
2 20 35
3 15 30
4 5 30
5 5 15
6 5 5

12. What is the IRR for each project?

13. What is the NPV for each project?

14. Using the IRR rule, which project should you choose?

15. Do you see any problem with this choice? Explain.

16. What is the crossover rate?

Q 17-18: You are pitching a project to your boss that has the following cash flows. Your boss is a big believer in the profitability index (PI).

Year Cash Flow
0 -\$500,000
1 100,000
2 75,000
3 150,000
4 150,000
5 100,000
6 200,000

17. What is the profitability index if the discount rate is 12%? Should you accept the project using the PI decision rule?

18. What is the profitability index if the discount rate is 18%? Should you accept the project using the PI decision rule?

NPV

Overview of Big Crick River Site
The proposed Big Crick River site is located .23 miles due west of the intersection of Bronco Road and Route 180 in the southwest corner of Johnson County. The Big Crick River is a strong-flowing, medium-sized river that is approximately a quarter-mile wide at the proposed project site. At this location, the river level drops by approximately 55 meters.

Summary of Proposed Investment
The proposed facility at the Big Crick River site consists of a small hydroelectric facility with two turbines (one primary and one backup) and two accompanying generators.

Because of the relatively small vertical drop of the river, a “low-head” hydroelectric plant would be most logical at this location. This means that the facility will not require a dam but will be constructed to make use of the run of the river. As a consequence, the facility will be unable to “store” water during high flow seasons; rather, its energy production will vary directly with the seasonal flows of the river. Fortunately, studies of the river at this location indicate a steady rate of flow, even through the dry summer months.

Electricity Production Determination
The amount of electricity that can be generated at a hydroelectric plant is dependent on two factors: (1) the “head,” or vertical distance (measured in meters) through which the water falls, and (2) the flow rate, measured in cubic meters per second. The electricity produced is proportional to the product of the head and the rate of flow.

The amount of electricity that can be generated by a hydroelectric facility can be roughly estimated using the following equation:

Power = 5.9 × Flow × Head

The potential power output of the Big Crick River site was calculated (using the equation shown above) based on the technical specifications for the site.

Estimated Profit Potential
Calculations using the current price of electricity and the power calculations for the site indicate that year-end revenues from the Big Crick River facility (with one turbine on line) will total \$190 million in year 1.

Preliminary negotiations have begun with the Steerville utilities committee regarding the possible purchase of electricity from the proposed Big Crick River facility. The Steerville committee is interested in purchasing the plant’s entire energy production in year 1 in order to supplement its current supply. In addition, there are indications that the town’s electricity needs will be growing each year in the foreseeable future (see the newspaper article on Steersville’s energy needs); again, the committee has indicated that it would like to meet this increased demand through a purchase from the Big Crick River facility. Calculations based on projections of future usage provided by the Steersville utilities committee indicate that profits from this facility will increase at a rate of 5 percent per year. The additional energy supply would be provided by bringing the second turbine online as needed.

Construction and Maintenance Expenses
Total cost for the construction of the facility, purchase and installation of turbines and generators, and running of necessary external supply cables is estimated at \$75 million. This expense is a one-time, up-front cost. The cost of bringing the second turbine on line is negligible. Annual operating expenses are projected to total \$180 million in year 1, resulting in a profit of \$10 million for that year.

NPV

Lugar Industries is considering an investment in a proposed project which requires an initial expenditure of \$100,000 at t = 0. This expenditure can be depreciated at the following annual rates:

Year Depreciation Rate
1 20%
2 32
3 19
4 12
5 11
6 6

The project has an economic life of six years. The project’s revenues are forecasted to be \$90,000 a year. The project’s operating costs (not including depreciation) are forecasted to be \$50,000 a year. After six years, the project’s estimated salvage value is \$10,000. The company’s WACC is 10 percent, and its corporate tax rate is 40 percent. What is the project’s net present value (NPV)?

a. \$31,684
b. \$33,843
c. \$34,667
d. \$38,840
e. \$45,453

NPV

NOTE: Unless otherwise stated, the borrowers and lenders do sell at the same market interest rate.

1. Shareholders of corporations generally do not vote on every investment decision but depend on managers to maximize value by:
(A) Choosing the highest net income projects.
(B) Investing at the market rate of return.
(C) Buying shares back from investors.
(D) Following the NPV rule to choose investments.

2. A corporation has the following opportunity to invest in a project with a return of \$77,000 in one period. The current investment is \$69,000.
The financial rate market rate is 8%. What is the NPV and the investment decision?
(A) -\$2,296; do not invest.
(B) \$2,296; invest.
(C) \$2,480; do not invest.
(D) \$8,000; invest.
(E) \$2,480; do not invest.

3. An individual with no investment opportunities has income of \$3,000 in period 0 and income of \$2,500 in period 1. If the interest rate is 3% and the individual is constrained to consume all income in period 1, then which of the following consumption patterns is not possible?
(A) \$0 in period 0 and \$5,590 in period 1.
(B) \$2,000 in period 0 and \$3,530 in period 1.
(C) \$0 in period 0 and \$5,427 in period 1.
(D) \$3,000 in period 0 and \$2,500 in period 1

4. Corporate managers maximize shareholder wealth by choosing positive NPV projects because:
(A) All investors have the same preferences.
(B) Dissatisfied shareholders can sell off shares.
(C) The separation theorem in financial markets states that all investors will be satisfied with the same investment decision regardless of personal preferences.
(D) Managers are wiser than shareholders regarding investments.

5. An individual has \$60,000 income in period 0 and \$30,000 income in period 1. If the individual desires to consume \$19,000 in period 1 and the market interest rate is 8%, what is the maximum amount of consumption in period 0?
(A) \$50,000
(B) \$70,185
(C) \$71,000
(D) \$61,880

NPV

Which has a greater Net Present Value (NPV), a payment of \$40,000 over 30 years beginning in 1950 or a payment of \$1 million per year for 20 years beginning in 2040, using an inflation value of 4%? Explain.

NPV

43. Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives.
Project A Project B
NPV \$15.090 \$14,693
Payback period 2.76 years 2.51 years
Required return 8.3% 8.0%
Matt has been asked for his best recommendation given this information. His recommendation should be to accept:
A. project B because it has the shortest payback period.
B. both projects as they both have positive net present values.
C. project A and reject project B based on their net present values.
D. project B and reject project A based on other criteria not mentioned in the problem.
E. project B and reject project A based on both the payback period and the average accounting return.

NPV

Sacramento Paper is considering two mutaully exclusive projects. Project A has an internal rate of return of 12 percent, while project B has an IRR of 14 percent. The two projects have the same risk, and when the cost of capital is 7 percent the projects have the same net present value (NPV). Assume each project has an initial cash outflow followed by a series of inflows. Given this information, which of the follwing statements is most correct?

a. If the cost of capital is 13 percent, Project B’s NPV will be higher than Project A’s NPV
b. If the cost of capital is 9 percent, Project B’s NPV will be higher than Projects A’s NPV.
c. If the cost of capital is 9 percent, Project B’s modified internal rate of return (MIRR) will be less thatn its IRR.
d. Statements a and c are correct.
e. All of the statements above are correct.

NPV

Calculate the NPV of the following project using a discount rate of 12%.

YR0 = -\$500;
YR1 = -\$50;
YR2 = \$50;
YR3 = \$200;
YR4 = \$400;
YR5 = \$400

NPV

A project requires an initial outlay of \$60,000 and is expected to yield an annual cash flow of E(X) = \$10,000. The cash flow is a perpetuity. The project’s beta is 2, the market portfolio’s mean rate of return is E(Rm) = 15%, and the riskless interest rate, r, is 4%. The firm is an all-equity firm.
Should the firm accept the project?
What is the project’s NPV?

NPV

You own an aluminum extrusion company. Your plant manager has recommended a new extrusion machine be bought for \$250,000. He says it will save \$65,000 per year in reduced labor costs and reduced aluminum waste. The machine will have a life of 8 years with no salvage value. Your required rate of return is 10%.

a. Please calculate the net present value of this investment. Should you make the investment?

b. Would you make the same decision if your required rate of return was 16 percent? Why or why not?

NPV

1. Rappaport Enterprises is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that a project’s projected NPV can be negative, in which case it will be rejected.

WACC:
10.00%
Year:0 1 2 3 4
Cash flows:-\$1,000 \$400 \$405 \$410 \$415

NPV

Calculate the net present value of a \$250,000 lottery win paid in equal annual installments over 5 years assuming a discount rate of 4%.

NPV

What is the net present value of the following cash flow at a discount rate of 11%?

T = 0 T = 1 T = 2
-120,000 300,000 -100,000

NPV

A coal stripping company currently operates three dozers for reclamation work. To reduce costs three alternatives are being considered for the future: rebuild the present equipment, purchase new dozers and employ a contractor. Details of the alternatives are given overleaf:

Rebuild Purchase Contractor
No of units required 3 2 N/A
Initial cost per unit \$360,000 \$920,000 \$0
Annual costs per unit:
Maintenance \$140,000 \$85,000
Labour \$240,000 \$160,000 \$525,000
Supplies \$58,000 \$42,000
Life 8 years 8 years 8 years
Salvage value per unit \$0 \$120,000 \$0
If interest is 8% annually, which alternative should be selected?

NPV

The initial cost of an investment is \$65,000 and the cost of capital is 10%. The return is \$16,000 per year for 8 years. What is the net present value?

Textbook info: Operations Management, 8th Edition
Authors: Jay Heizer and Barry Render
Prentice-Hall

NPV

You are considering 2 independent projects with the following cash flows. The required return for both projects is 16 percent. Given this information which one of the following statements is correct?

year Project A Project B
0 -\$125,000 -\$135,000
1 46,000 50,000
2 79,000 30,000
3 51,000 110,000

a. You should accept Project A and reject B based on their respective NPV’s

b. You should accept project B and reject Project A based on their respective NPV’s

c. You should accept project A and reject Project B based on their respective IRR’s

d. You should accept Project B and reject PRoject A based on their respective IRR’s

e. You should accept both projects based on both the NPV and IRR decision rules.

NPV

Crittenden Company is considering two mutually exclusive investments in capital equipment. The company has a 10% cost of capital. Cash flow information for the two alternatives is below.
Investment 1 Investment 2
Initial investment in equipment \$210,000 \$135,000
Increase in annual cash flows \$ 60,000 \$ 40,000
Life of equipment 5 years 5 years
Salvage value of equipment 0 0

a. Determine the present value of the initial investment for each alternative.
b. Determine the present value of the annual cash in flows for each alternative.
c. Compute the net present value for each investment.
d. Compute the profitability index for each investment.
e. Which investment would you recommend? Why?

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