Managerial Finance npv

[i]. Real Time Systems Inc. is considering the development of one of two mutually exclusive new computer models. Each will require a net investment of $5,000. The cash flow figures for each project are shown below:

Period Project A Project B

1 $2,000 $3,000

2 2,500 2,600

3 2,250 2,900

Model B, which will use a new type of laser disk drive, is considered a high-risk project, while Model A is of average risk. Real Time adds 2 percentage points to arrive at a risk-adjusted cost of capital when eval­uating a high-risk project. The cost of capital used for average-risk projects is 12 percent. Which of the following statements regarding the NPVs for Models A and B is most correct?

a. NPV_A = $380; NPV_B = $1,815.

b. NPV_A = $197; NPV_B = $1,590.

c. NPV_A = $380; NPV_B = $1,590.

d. NPV_A = $5,380; NPV_B = $6,590.

e. None of the statements above is correct.

[ii]. Cochran Corporation has a weighted average cost of capital of 11 percent for projects of average risk. Projects of below-average risk have a cost of capital of 9 percent, while projects of above-average risk have a cost of capital equal to 13 percent. Projects A and B are mutually exclusive, whereas all other projects are independent. None of the projects will be repeated. The following table summarizes the cash flows, internal rate of return (IRR), and risk of each of the projects.

Year (t)	Project A	Project B	Project C	Project D	Project E
0	-$200,000	-$100,000	-$100,000	-$100,000	-$100,000
1	66,000	30,000	30,000	30,000	40,000
2	66,000	30,000	30,000	30,000	25,000
3	66,000	40,000	30,000	40,000	30,000
4	66,000	40,000	40,000	50,000	35,000
IRR	12.110%	14.038%	10.848%	16.636%	11.630%
Project Risk	Below Average	Below Average	Average	Above Average	Above Average

Which projects will the firm select for investment?

a. Projects: A, B, C, D, E

b. Projects: B, C, D, E

c. Projects: B, D

d. Projects: A, D

e. Projects: B, C, D

Multiple part:

(The following information applies to the next four problems.)

[MACRS table required]

The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent.

[iii]. What is the net investment required at t = 0?

a. -$42,000

b. -$40,000

c. -$38,600

d. -$37,600

e. -$36,600

[iv]. What is the operating cash flow in Year 2?

a. $ 9,000

b. $10,240

c. $11,687

d. $13,453

e. $16,200

[v]. What is the total value of the terminal year non-operating cash flows at the end of Year 3?

a. $18,120

b. $19,000

c. $21,000

d. $25,000

e. $27,000

[vi]. What is the project's NPV?

a. $2,622

b. $2,803

c. $2,917

d. $5,712

e. $6,438

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