NPV

 

1.   Two investments (A and B, below) have been proposed to the Capital Investment committee of your organization;

 

a.       The required rate of return for your company is 6%.  What is the NPV for each investment?

 

b.      What is the payback period for each investment?

 

c.       Which investment would you recommend and why?

 

 

 

 

 

 

 

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NPV

Bull Gator Industries is considering a new assembly line costing $6,000,000. The assembly line will be fully depreciated by the simplified straight line method over its 5 year depreciable life. Operating costs of the new machine are expected to be $1,100,000 per year. The existing assembly line has 5 years remaining before it will be fully depreciated and has a net book value of $3,000,000. If sold today the company would receive $2,400,000 for the existing machine. Annual operating costs on the existing machine are $2,100,000 per year. Bull Gator is in the 46 percent marginal tax bracket and has a required rate of return of 12 percent. (10 points)

 

 

 

Required: Calculate the net present value of replacing the existing machine. 

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NPV

1. Firm evaluates all of its projects by applying the IRR rule.

Year Cash Flow

0 –$ 150,000

1 66,000

2 73,000

3 57,000

Requirement 1:

What is the project’s IRR? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Internal rate of return ______ %

Requirement 2:

If the required return is 16 percent, should the firm accept the project?

Yes or No

2. Consider the following cash flows:

Year Cash Flow

0 –$ 33,000

1 13,900

2 17,800

3 11,300

Required:

What is the IRR of the above set of cash flows? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Internal rate of return _____ %

3. Romboski, LLC, has identified the following two mutually exclusive projects:

Year Cash Flow (A) Cash Flow (B)

0 −$ 62,000 −$ 62,000

1 38,000 24,800

2 32,000 28,800

3 22,000 34,000

4 14,400 24,800

Requirement 1:

(a)

What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answer as a percentage roundedto 2 decimal places (e.g., 32.16).)

Internal rate of return

Project A %

Project B %

(b) If you apply the IRR decision rule, which project should the company accept?

Select one: Project A or Project B

Requirement 2:

(a)

Assume the required return is 13 percent. What is the NPV for each of these projects? (Do not round intermediate calculations.Round your answers to 2 decimal places (e.g., 32.16).)

Net present value

Project A $

Project B $

(b) Which project will you choose if you apply the NPV decision rule?

Select One: Project A or Project B

Requirement 3:

(a)

Over what range of discount rates would you choose Project A? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Project A @ % _________

Select one : Above or Below

(b)

Over what range of discount rates would you choose Project B? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Project B @ % _____________

Select one: Above or Below

(c)

At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Discount rate %

4. Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 19 percent.

Year Project M Project N

0 –$136,000 –$369,000

1 64,900 145,500

2 82,900 194,000

3 73,900 130,500

4 59,900 124,000

Required:

(a)

What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

IRR

Project M %

Project N %

(b)

What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

NPV

Project M $

Project N $

(c) Which, if either, of the projects should the company accept?

Select one: Project N, Project M, Both, Neither

5.

An investment has an installed cost of $567,382. The cash flows over the four-year life of the investment are projected to be $196,584, $240,318, $188,674, and $156,313.

Requirement 1:

If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.)

NPV $

Requirement 2:

If the discount rate is infinite, what is the NPV? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign.)

NPV $

Requirement 3:

At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Discount rate %

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