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Topic 5 Warm Up Problems

# Topic 5 Warm Up Problems - flow is \$0 and discount rate is...

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Warm up Problems for Topic 5 (Capital Budgeting) **These questions are designed to represent elementary principles, and are NOT representative of problems that you will find on any exams. 1. Company A is considering a new piece of equipment. It will cost \$6,000 and will produce cash flows of \$1,000 every year for the next 12 years (the first cash flow will be exactly one year from today). 1a) What is the NPV if the appropriate discount rate is 10%? 1b) What is the NPV if the appropriate discount rate is 12%? 1c) What is the NPV if the appropriate discount rate is 15%? 2. Using the new piece of equipment from question 1, if the company is able to invest in an upgrade which would cost \$1000 in year 5, but would increase the cash flows in years 6-12 to \$2,000, what is the new NPV? (year 5 cash
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Unformatted text preview: flow is \$0 and discount rate is 15%) 3. Company X is considering a piece of equipment that costs \$3,000 and will produce cash flows of \$1200 in each of the next three years. What is the IRR of the project? 4. Company Z is considering a new machine. The machine will cost \$1MM and will be depreciated on a straight line basis for five years to a zero salvage value. Revenues from the machine are expected to be \$800,000 per year and all associated expenses are expected to be 50% of revenue. If the company is taxed at a rate of 34% and the appropriate discount rate is 15%, will the company invest in this new machine? 4a) If the company’s discount rate increases to 20%, will they invest in the machine? 4b) What is the IRR of the investment?...
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