BUS 330 - Week 6 Assignment (2015)

Problem 1
1.

A company is evaluating a project with the following projected cash flow characteristics. Calculate the NPV, IRR and Payback period.
Assume the company requires a return greater than 9% for this project and a payback period of less than 5 years to undertake it. Based on
your findings should the company undertake the project? Explain.
Annual
Payback
Payment
Calculation
($75,000)
$5,000
$25,000
$25,000
$10,000
$50,000
$40,000

Year
0
1
2
3
4
5
6
a.
b.
c.
d.

NPV:
IRR:
Payback period:

Rasmussen College - BUS 330 - Week 6 Assignment
Problem 2
2.

A company is evaluating between two mutually exclusive projects. The estimated cash flows are indicated below. Calculate the NPV and
IRR for both projects. The discount rate related to Project A is 12% and the discount rate related to Project B is 16%.
a) Assuming the company is trying to maximize NPV which project should it undertake?
b) Assume the company is trying to maximize the IRR, which project should it undertake?

Year
0
1
2
3
4
5
6
Discount Rate:
a) NPV:
b) IRR:

Project A
($100,000)
$0
$0
$0
$0
$0
$250,000

Project A
($5,000)
$1,500
$1,500
$1,500
$1,500
$1,500
$3,000

12%

16%

Rasmussen College - BUS 330 - Week 6 Assignment
Problem 3
3.

Below are the relevant financial statement details of a project. Please anwer the subsequent questions.
Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

$325,000

$350,000

$375,000

$400,000

($195,000) ($210,000) ($225,000)

($240,000)

Income Statement:
Revenues

$300,000

Cost of Goods Sold

($180,000)

Gross Profit

$120,000

$130,000

$140,000

$150,000

SG&A

($30,000)

($32,500)

($35,000)

($37,500)

($40,000)

Depreciation Expense

($50,000)

($50,000)

($50,000)

($50,000)

($50,000)

Operating Income

$160,000

$40,000

$55,000

$62,500

$70,000

($19,000)

($22,000)

($25,000)

($28,000)

$24,000

Net Income

$47,500

($16,000)

Taxes

$28,500

$33,000

$37,500

$42,000

$0
($2,500)
($2,500)

$0
($2,500)
($2,500)

$0
($2,500)
($2,500)

$0
($2,500)
($2,500)

$0
$25,000
$25,000

Balance Sheet Items:
Investments in equipment
Investment in working capital
Net Balance Sheet Changes

($250,000)
($25,000)
($275,000)

a. Calculate the projected cash flows.
Year 0
Net Income
Addback Depreciation
Net Balance Sheet Changes
Cash Flows

Year 1

$-

$-

Year 2

$-

Year 3

$-

Year 4

$-

Year 5

$-

b. If the company requires a rate of return of at least 12% should it accept this project?
Discount rate:
NPV:
Accept or Reject?

c. Assume the following scenario:
i) SG&A increases by 20% in each year,
ii) Investment in equipment in Year 0 increases by 50%
Should the company accept the project in this scenario?
Note, the increase in the initial investment in equipment will require a corresponding change in the Depreciation. The equipment is
depreciated in a straight-line and has no value remaining at the end of the project.

Show details and calculations as needed.