Finance problems
Question # 00033224
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Updated on: 11/24/2014 03:33 PM Due on: 11/30/2014
10-1 – NPV
A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project’s NPV? (Hint: Begin by constructing the timeline)
10-2 – IRR
Refer to problem 10-1. What is the project’s IRR?
10-3 – MIRR
Refer to problem 10-1. What is the project’s MIRR?
10-4 – Profitability Index
Refer to problem 10-1. What is the project’s PI?
10-5 – Payback
Refer to problem 10-1. What is the project payback period?
10-6 – Discounted payback
Refer to problem 10-1. What is the project discounted payback period?
10-7 – NPV
Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows:
YEAR PROJECT A PROJECT B
1 $ 5,000,000 $20,000,000
2 10,000,000 10,000,000
3 20,000,000 6,000,000
A. What are the two projects' net present values, assuming the cost of capital is:
a) 5%?
b) 10%?
c) 15%?
B. What are the two project’s IRRs at the same cost of capital?
Problem 8
- Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this years' capital budget. The projects are independent. The cash outlay for the truck is $17,100, and that for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows including depreciation , are as follows:
Year Truck Pulley
1 $5,100 $7,500
2 $5,100 $7,500
3 $5,100 $7,500
4 $5,100 $7,500
5 $5,100 $7,500
Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept/reject decision for each.
Problem 9
Problem 10
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method ? Which should actually be selected
problem 14
The Ewert Exploration Company is considering two mutually exclusive plans for extracting oil on property for which it has mineral rights. Both plans call for the expenditure of $10 million to drill development wells. Under Plan A, all the oil will be extracted in 1 year, producing a cash flow at t = 1 of $12 million; under Plan B, cash flows will be $1.45 million per year for 20 years.
1. What are the annual incremental cash flows that will be available to Ewert Exploration if it undertakes Plan B rather than Plan A? (Hint: Subtract Plan A's flows from B's.)
Year Incremental Cash Flow (B-A)
1 $_________________
2-20 $_________________
If the company accepts Plan A and then invests the extra cash generated at the end of Year 1, what rate of return (reinvestment rate) would cause the cash flows from reinvestment to equal the cash flows from Plan B? Round your answer to two decimal places.
_________________%
2. Suppose a firm’s cost of capital is 10%. Is it logical to assume that the firm would take on all available independent projects (of average risk) with returns greater than 10%? Further, if all available projects with returns greater than 10% have been taken, would this mean that cash flows from past investments would have an opportunity cost of only 10%, because all the firm could do with these cash flows would be to replace money that has a cost of 10%? Finally, does this imply that the cost of capital is the correct rate to assume for the reinvestment of a project’s cash flows? Answer below:
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
3.
Identify each project's IRR. Round your answers to two decimal places.
Project A ____________________%
Project B ____________________%
A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project’s NPV? (Hint: Begin by constructing the timeline)
10-2 – IRR
Refer to problem 10-1. What is the project’s IRR?
10-3 – MIRR
Refer to problem 10-1. What is the project’s MIRR?
10-4 – Profitability Index
Refer to problem 10-1. What is the project’s PI?
10-5 – Payback
Refer to problem 10-1. What is the project payback period?
10-6 – Discounted payback
Refer to problem 10-1. What is the project discounted payback period?
10-7 – NPV
Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows:
YEAR PROJECT A PROJECT B
1 $ 5,000,000 $20,000,000
2 10,000,000 10,000,000
3 20,000,000 6,000,000
A. What are the two projects' net present values, assuming the cost of capital is:
a) 5%?
b) 10%?
c) 15%?
B. What are the two project’s IRRs at the same cost of capital?
Problem 8
- Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this years' capital budget. The projects are independent. The cash outlay for the truck is $17,100, and that for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows including depreciation , are as follows:
Year Truck Pulley
1 $5,100 $7,500
2 $5,100 $7,500
3 $5,100 $7,500
4 $5,100 $7,500
5 $5,100 $7,500
Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept/reject decision for each.
Problem 9
Davis Industries must choose between a gas powered and a electric powered forklift truck for moving materials in its factory. Since both forklifts perform the same function , the firm will choose only one. The are mutually exclusive investments. The electric powered truck will cost more but it will be less expensive to operate. It will cost 22000 whereas the gas powered truck will cost 17500 .the cost of the capital applies to both investments is 12%. The life for both types of truck is estimated to be 6 yeatrs during which time the net cash flows for the electric powered truck will be 6290 per year and those the gas powred truck will be 5000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck and decide which to recommend
Problem 10
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method ? Which should actually be selected
problem 14
The Ewert Exploration Company is considering two mutually exclusive plans for extracting oil on property for which it has mineral rights. Both plans call for the expenditure of $10 million to drill development wells. Under Plan A, all the oil will be extracted in 1 year, producing a cash flow at t = 1 of $12 million; under Plan B, cash flows will be $1.45 million per year for 20 years.
1. What are the annual incremental cash flows that will be available to Ewert Exploration if it undertakes Plan B rather than Plan A? (Hint: Subtract Plan A's flows from B's.)
Year Incremental Cash Flow (B-A)
1 $_________________
2-20 $_________________
If the company accepts Plan A and then invests the extra cash generated at the end of Year 1, what rate of return (reinvestment rate) would cause the cash flows from reinvestment to equal the cash flows from Plan B? Round your answer to two decimal places.
_________________%
2. Suppose a firm’s cost of capital is 10%. Is it logical to assume that the firm would take on all available independent projects (of average risk) with returns greater than 10%? Further, if all available projects with returns greater than 10% have been taken, would this mean that cash flows from past investments would have an opportunity cost of only 10%, because all the firm could do with these cash flows would be to replace money that has a cost of 10%? Finally, does this imply that the cost of capital is the correct rate to assume for the reinvestment of a project’s cash flows? Answer below:
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
_________________________________________________________
3.
Identify each project's IRR. Round your answers to two decimal places.
Project A ____________________%
Project B ____________________%
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Rating:
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Solution: Finance problems