Finance
Please show your work:
1.
An investment project provides cash inflows of $630 per year for eight years.
What is the project payback period if the initial cost is $1,775? (Enter 0 if the project never pays back. Round your answer
to 2 decimal places, e.g., 32.16.)
Payback period years
What is the project payback period if the initial cost is $3,450? (Enter 0 if the project never pays back. Round your answer
to 2 decimal places, e.g., 32.16.)
Payback period years
What is the project payback period if the initial cost is $5,200? (Enter 0 if the project never pays back. Round your answer
to 2 decimal places, e.g., 32.16.)
Payback period years
2.
Siva, Inc., imposes a payback cutoff of three years for its international investment projects.
Year Cash Flow (A) Cash Flow (B)
0 –$ 52,000 –$ 62,000
1 19,000 11,000
2 20,000 14,000
3 17,000 18,000
4 4,000 222,000
________________________________________
What is the payback period for both projects? (Round your answers to 2 decimal places, e.g., 32.16.)
Payback period
Project A years Project B years ________________________________________
Which project should the company accept?
Project B
Project A
3.
An investment project has annual cash inflows of $3,500, $4,400, $5,600, and $4,800, for the next four years, respectively.
The discount rate is 14 percent.
What is the discounted payback period for these cash flows if the initial cost is $6,200? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
Discounted payback period years
What is the discounted payback period for these cash flows if the initial cost is $8,300? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
Discounted payback period years
What is the discounted payback period for these cash flows if the initial cost is $11,300? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
Discounted payback period years 4.
An investment project costs $10,000 and has annual cash flows of $2,950 for six years.
What is the discounted payback period if the discount rate is zero percent? (Enter 0 if the project never pays back. Round
your answer to 2 decimal places, e.g., 32.16.)
Discounted payback period years
What is the discounted payback period if the discount rate is 4 percent? (Enter 0 if the project never pays back. Round your
answer to 2 decimal places, e.g., 32.16.)
Discounted payback period years
What is the discounted payback period if the discount rate is 21 percent? (Enter 0 if the project never pays back. Round your
answer to 2 decimal places, e.g., 32.16.)
Discounted payback period years 5.
You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an
installation cost of $11.9 million, which will be depreciated straight-line to zero over its four-year life. If the plant has
projected net income of $1,844,300, $1,897,600, $1,866,000, and $1,319,500 over these four years, what is the project’s
average accounting return (AAR)? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal
places, e.g., 32.16.)
Average accounting return % 6.
What is the IRR of the following set of cash flows? (Do not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)
Year Cash Flow
0 –$ 15,500
1 6,200
2 7,500
3 6,000
________________________________________
IRR %
7.
A project has the following cash flows:
Year Cash Flow
0 –$ 15,800
1 6,500
2 7,800
3 6,300
________________________________________
What is the NPV at a discount rate of zero percent? (Do not round intermediate calculations and round your answer to the
nearest whole number, e.g., 32.)
NPV $
What is the NPV at a discount rate of 10 percent? (Do not round intermediate calculations and round your answer to 2 decimal
places, e.g., 32.16.)
NPV $
What is the NPV at a discount rate of 18 percent? (Negative amount should be indicated by a minus sign. Do not round
intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
NPV $
What is the NPV at a discount rate of 29 percent? (Negative amount should be indicated by a minus sign. Do not round
intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
NPV $
8.
Garage, Inc., has identified the following two mutually exclusive projects:
Year Cash Flow (A) Cash Flow (B)
0 –$ 28,500 –$ 28,500
1 13,900 4,050
2 11,800 9,550
3 8,950 14,700
4 4,850 16,300
________________________________________
a-1 What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answers as a percent
rounded to 2 decimal places, e.g., 32.16.)
IRR
Project A % Project B % ________________________________________
a-2 Using the IRR decision rule, which project should the company accept?
Project A
Project B
a-3 Is this decision necessarily correct?
Yes
No
b-1 If the required return is 11 percent, what is the NPV for each of these projects? (Do not round intermediate
calculations and round your answers to 2 decimal places, e.g., 32.16.)
NPV
Project A $ Project B $ ________________________________________
b-2 Which project will the company choose if it applies the NPV decision rule?
Project A
Project B
c. At what discount rate would the company be indifferent between these two projects? (Do not round intermediate
calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Discount rate %
9.
The Sloan Corporation is trying to choose between the following two mutually exclusive design projects:
Year Cash Flow
(I) Cash Flow
(II)
0 –$ 65,000 –$ 17,900
1 30,000 9,650
2 30,000 9,650
3 30,000 9,650
________________________________________
a-1 If the required return is 12 percent, what is the profitability index for both projects? (Do not round intermediate
calculations. Round your answers to 3 decimal places, e.g., 32.161.)
Profitability
Index
Project I Project II ________________________________________
a-2 If the company applies the profitability index decision rule, which project should the firm accept?
Project I
Project Il
b-1 What is the NPV for both projects? (Negative amounts should be indicated by a minus sign. Do not round intermediate
calculations and round your answers to 2 decimal places, e.g., 32.16.)
NPV
Project I $ Project II $ ________________________________________
b-2 If the company applies the NPV decision rule, which project should it take?
Project I
Project II
10.
RAK Corp. is evaluating a project with the following cash flows:
Year Cash Flow
0 –$ 28,700
1 10,900
2 13,600
3 15,500
4 12,600
5 – 9,100
________________________________________
The company uses an interest rate of 8 percent on all of its projects.
Calculate the MIRR of the project using the discounting approach. (Do not round intermediate calculations. Enter your answer
as a percent rounded to 2 decimal places, e.g., 32.16.)
MIRR %
Calculate the MIRR of the project using the reinvestment approach. (Do not round intermediate calculations. Enter your answer
as a percent rounded to 2 decimal places, e.g., 32.16.)
MIRR %
Calculate the MIRR of the project using the combination approach. (Do not round intermediate calculations. Enter your answer
as a percent rounded to 2 decimal places, e.g., 32.16.)
MIRR %
11.
Winnebagel Corp. currently sells 30,000 motor homes per year at $45,000 each, and 12,000 luxury motor coaches per year at
$85,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 19,000 of
these campers per year at $12,000 each. An independent consultant has determined that if Winnebagel introduces the new
campers, it should boost the sales of its existing motor homes by 4,500 units per year, and reduce the sales of its motor
coaches by 900 units per year.
Required :
What is the amount to use as the annual sales figure when evaluating this project?
rev: 09_18_2012
$354,000,000
$371,700,000
$336,300,000
$507,000,000
$228,000,000
12.
Consider the following income statement:
Sales $ 492,696
Costs 320,544
Depreciation 72,900
Taxes 31 %
________________________________________
Required:
(a ) Calculate the EBIT.
(b ) Calculate the net income.
(c ) Calculate the OCF.
(d ) What is the depreciation tax shield?
13.
A proposed new project has projected sales of $171,700, costs of $86,860, and depreciation of $6,060. The tax rate is 33
percent. Calculate operating cash flow using the four different approaches.
Requirement 1:
The common calculation Approach (Do not round your intermediate calculations):
Requirement 2:
The Bottom-Up Approach (Do not round your intermediate calculations):
Requirement 3:
The Top-Down Approach (Do not round your intermediate calculations):
Requirement 4:
The Tax-Shield Approach (Do not round your intermediate calculations):
14.
Summer Tyme, Inc., is considering a new 5-year expansion project that requires an initial fixed asset investment of $3.132
million. The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which time it will be
worthless. The project is estimated to generate $2,784,000 in annual sales, with costs of $1,113,600.
Required:
If the tax rate is 32 percent, what is the OCF for this project?
rev: 09_18_2012
$1,269,504
$1,670,400
$1,336,320
$709,920
$1,403,136
15.
Summer Tyme, Inc., is considering a new 3-year expansion project that requires an initial fixed asset investment of $4.4
million. The fixed asset falls into the 3-year MACRS class (MACRS Table) and will have a market value of $340,200 after 3
years. The project requires an initial investment in net working capital of $486,000. The project is estimated to generate
$3,888,000 in annual sales, with costs of $1,555,200. The tax rate is 32 percent and the required return on the project is 12
percent. (Do not round your intermediate calculations.)
Required:
(a) What is the project’s year 0 net cash flow?
(b) What is the project’s year 1 net cash flow?
(c) What is the project’s year 2 net cash flow?
(d) What is the project’s year 3 net cash flow?
(e) What is the NPV?
16.
Dog Up! Franks is looking at a new sausage system with an installed cost of $397,800. This cost will be depreciated straight
-line to zero over the project’s 8-year life, at the end of which the sausage system can be scrapped for $61,200. The sausage
system will save the firm $122,400 per year in pretax operating costs, and the system requires an initial investment in net
working capital of $28,560.
Required:
If the tax rate is 35 percent and the discount rate is 12 percent, what is the NPV of this project?
rev: 09_18_2012
$87,068.48
$82,922.36
$83,880.98
$66,855.89
$99,947.46
17.
Your firm is contemplating the purchase of a new $1,344,000 computer-based order entry system. The system will be depreciated
straight-line to zero over its 5-year life. It will be worth $120,000 at the end of that time. You will save $528,000 before
taxes per year in order processing costs and you will be able to reduce working capital by $177,994 (this is a one-time
reduction).
Required :
If the tax rate is 30 percent, what is the IRR for this project? (Do not round your intermediate calculations.)
rev: 09_18_2012
26.88%
18.01%
24.58%
24.41%
25.60%
18.
Your firm is contemplating the purchase of a new $499,500 computer-based order entry system. The system will be depreciated
straight-line to zero over its 5-year life. It will be worth $48,600 at the end of that time. You will be able to reduce
working capital by $67,500 (this is a one-time reduction). The tax rate is 32 percent and your required return on the project
is 22 percent and your pretax cost savings are $226,750 per year.
Requirement 1:
What is the NPV of this project?
Requirement 2:
What is the NPV if the pretax cost savings are $163,250 per year?
Requirement 3:
At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?
19.
A 9-year project has an initial fixed asset investment of $29,820, an initial NWC investment of $2,840, and an annual OCF of
-$45,440. The fixed asset is fully depreciated over the life of the project and has no salvage value.
Required:
If the required return is 11 percent, what is the project’s equivalent annual cost, or EAC? (Do not round your intermediate
calculations.)
rev: 09_18_2012
$-43,467.25
$-48,581.04
$-53,694.84
$-51,137.94
$-31,461.47
20.
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,290,000 and
will last for 7 years. Variable costs are 35 percent of sales, and fixed costs are $172,000 per year. Machine B costs
$4,480,000 and will last for 9 years. Variable costs for this machine are 31 percent of sales and fixed costs are $106,000
per year. The sales for each machine will be $8.96 million per year. The required return is 10 percent and the tax rate is 35
percent. Both machines will be depreciated on a straight-line basis.
Required:
(a) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine A?
(Do not round your intermediate calculations.)
(b) If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine B?
(Do not round your intermediate calculations.)