Sample Problems
—
Capital Budgeting
—
part 1
1.
Lloyd Enterprises has a project which has the following cash flows:
Year
Cash Flow
0
$200,000
1
50,000
2
100,000
3
150,000
4
40,000
5
25,000
The cost of capital is 10 percent.
What is the proje
ct’s discounted payback?
2.
McCarver Inc. is considering the following mutually exclusive projects”
Project A
Project B
Year
Cash Flow
Cash Flow
0
$5,000
$5,000
1
200
3,000
2
800
3,000
3
3,000
800
4
5,000
200
At what cost of capital will the net present value of the two projects be the same?
(That is, what is the
“crossover” rate?)
3.
What is the internal rate of return for a project that has a net investment of $14,600 (Time 0 outflow)
and a single net cash flow of $25,750 in 5 years?
Use the following information for the next two questions:
The director of capital budgeting for Giant Inc. has identified two mutually exclusive projects, L and S,
with the following expected net cash flows:
Expected Net Cash Flows
Year
Project L
Project S
0
1
2
3
$100
10
60
80
$100
70
50
20
Both projects have a required rate of return of 10 percent.
4.
What
is the NPV for project S?
5.
What is the crossover rate for the two projects
—
that is, at what interest rate will the NPVs for the two
projects be equal?
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6.
Genuine Products Inc. requires a new machine.
Two companies have submitted bids, and you have
been assigned the task of choosing one of the machines.
Cash flow analysis indicates the following:
Year
Machine A
Machine B
0
1
2
3
4
$2,000
0
0
0
3,877
$2,000
832
832
832
832
What is the internal rate of return for each machine?
Use the following information for the next two problems:
The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of
$30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9 and $40,000 in Year 10.
This
investment will cost the firm $150,000 today, and the firm's required rate of return is 10 percent.
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 Fall '10
 thomasrhee
 Cost Of Capital, Net Present Value

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