Sample_mid_1_271 - Sample Mid term 1 (72-271-30) Ch. 7, 8,...

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Sample Mid term 1 (72-271-30) 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 after-tax 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 straight-line 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. Ans:
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This note was uploaded on 02/09/2012 for the course ECON 440 taught by Professor Fenn during the Spring '11 term at American Internation College.

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Sample_mid_1_271 - Sample Mid term 1 (72-271-30) Ch. 7, 8,...

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