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c. Would your answer to part a of this problem be different if the yearly
payments were made at the beginning of each year? Show what difference,
if any, that change in timing would make to the present value calculation.
d. The after-tax cash inflows associated with this purchase are projected to
amount to $250,000 per year for 15 years. Will this factor change the firm’s
decision about how to fund the initial investment? LG3 9–8 NPV and maximum return A firm can purchase a fixed asset for a $13,000 initial investment. The asset generates an annual after-tax cash inflow of $4,000
for 4 years.
a. Determine the net present value (NPV) of the asset, assuming that the firm
has a 10% cost of capital. Is the project acceptable?
b. Determine the maximum required rate of return (closest whole-percentage
rate) that the firm can have and still accept the asset. Discuss this finding in
light of your response in part a. LG3 9–9 NPV—Mutually exclusive projects Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are CHAPTER 9 Capital Budgeting Techniques 417 under consideration. The relevant cash flows associated with each are shown in
the following table. The firm’s cost of capital is 15%.
Initial investment (CF0) Press B Press C $85,000 $60,000 $130,000 Year (t) Cash inflows (CFt) 1 $18,000 $12,000 $50,000 2 18,000 14,000 30,000 3 18,000 16,000 20,000 4 18,000 18,000 20,000 5 18,000 20,000 20,000 6 18,000 25,000 30,000 7 18,000 40,000 8 18,000 — 50,000 a. Calculate the net present value (NPV) of each press.
b. Using NPV, evaluate the acceptability of each press.
c. Rank the presses from best to worst using NPV.
LG2 LG3 9–10 Payback and NPV Neil Corporation has three projects under consideration.
The cash flows for each of them are shown in the following table. The firm has a
16% cost of capital.
Initial investment (CF0) Project B Project C $40,000 $40,000 $40,000 Year (t) Cash inflows (CFt) 1 $13,000 $ 7,000 $19,000 2 13,000 10,000 16,000 3 13,000 13,000 13,000 4 13,000 16,000 10,000 5 13,000 19,000 7,000 a. Calculate each project’s payback period. Which project is preferred according
to this method?
b. Calculate each project’s net present value (NPV). Which project is preferred
according to this method?
c. Comment on your findings in parts a and b, and recommend the best project.
Explain your recommendation.
LG4 9–11 Internal rate of return For each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each project, the maximum cost of capital that the firm could have and still find the IRR acceptable. 418 PART 3 Long-Term Investment Decisions Project A Project C Project D $90,000 Initial investment (CF0) Project B
$490,000 $20,000 $240,000 Year (t) Cash inflows (CFt) 1 $7,500 $120,000 150,000 7,500 100,000 30,000 150,000 7,500 80,000 4 35,000 150,000 7,500 60,000 5 9–12 $150,000 25,000 3 LG4 $20,000 2 40,000 — 7,500 — IRR—Mutually exclusive projects Bell Manufacturing is attempting to choose
the better of two mutually exclusive projects for expanding the firm’s warehouse
capacity. The relevant cash flows for the projects are shown in the following
table. The firm’s cost of capital is 15%.
Initial investment (CF0)
Year (t) Project...
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This document was uploaded on 01/19/2014.
- Fall '13