Session6_HWSolution - expects this equipment will lead to...

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Session 6 Homework Solutions Solution: Year 0 Year 1 Year 2 Year 3 Year 5 Year 6 ($4,133,250) $814,322 $863,275 $937,250 $1,212,960 $1,225,000 i= 15% Find NPV= ($441,933.01) Solution: Time 0 1 2 CF ($3,768,966) $979,225 $1,158,886 Cumulative CF ($3,768,966) ($2,789,741) ($1,630,855) PB= Years before cost recovery + (Remaining cost to recover/ Cash flow during the year) 2.87 Year Project 1 Project 2 0 ($8,425,375) ($11,368,000) 1 $3,225,997 $2,112,589 2 $1,775,882 $3,787,552 3 $1,375,112 $3,125,650 4 $1,176,558 $4,115,899 5 $1,212,645 $4,556,424 6 $1,582,156 7 $1,365,882 Find NPV= ($668,283.21) $375,375.16 Since Project 2 is positive we accept this project. Year Project 1 Project 2 0 ($1,250,000) ($1,250,000) 1 $250,000 $350,000 2 $350,000 $350,000 3 $450,000 $350,000 4 $500,000 $350,000 5 $750,000 $350,000 Solution: Find NPV= $186,683.07 ($76,745.72) Find IRR= 20.1% 12.4% Given a required rate of return of 15 percent, Project 1 will be accepted as the IRR of 20.1 percent exceeds the required rate of return. Project 2 will be rejected. 10.2 Net present value: Kingston, Inc., is looking to add a new machine at a cost of $4,133,250. The company
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Unformatted text preview: expects this equipment will lead to cash flows of $814,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? 10.5 Payback: Quebec, Inc., is purchasing machinery at a cost of $3,768,966. The company expects, as a result, cash flows of $979,225, $1,158,886, and $1,881,497 over the next three years. What is the payback period? 10.24 Draconian Measures, Inc., is evaluating two independent projects. The company uses a 13.8 percent discount rate for such projects. Cost and cash flows are shown in the table. What are the NPVs of the two projects? 10.28 Jekyll & Hyde Corp. is evaluating two mutually exclusive projects. Their cost of capital is 15 percent. Costs and cash flows are given in the following table. Which project should be accepted?...
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This note was uploaded on 03/12/2012 for the course FINANCE 630 taught by Professor Smith during the Spring '12 term at University of Maryland Baltimore.

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