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Capital budgeting part 1 - Sample Problems-Capital...

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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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