Sample Mid term 1 (7227130)
Ch. 7, 8, 9, 11
Q. 1
Find the IRR for a project costing $36,500 and returning $5,000 annually for the first four
years, followed by $11,000 annually for three years.
Hint:
At a discount rate of 7
percent the project's NPV is $2,458.91 and changes to $1,966.86 at a discount rate of 10
percent.
Ans:
$36,500 = $5,000
1
(1
$11,000
1
(1
4

+
+

+


i)
i
i)
i
3
8.6022% =
i
Q. 2
A new machine will cost $100,000 and generate aftertax cash inflows of $35,000 for
four years.
Find the NPV if the firm uses a 12 percent opportunity cost of capital.
What
is the IRR?
What is the payback period?
Ans:
NPV
= $35,000
1
.12
1
128(1.12)
4

– $100,000
= $35,000 [8.33
– 5296] – 100,000
= $35,000 [3.037]
– $100,000
= 106,307.23 – 100,000
= $6,307.23
IRR
=
$35,000
1
1
(1 + )
4
i
i
i

– $100,000
= 14.96%
Payback Period
=
100,000
35,000
= 2.857
years
Q. 3
Calculate the NPV for the following capital budgeting proposal:
$100,000 initial cost, to
be depreciated straightline over five years to an expected salvage value of $5,000, 35
percent tax rate, $45,000 additional annual revenues, $15,000 additional annual expense,
$8,000 additional investment in working capital, 11 percent cost of capital.
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 Spring '11
 Fenn
 Economics, Net Present Value, Internal rate of return, annual cash flows

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