HW 8 CH 10 Con

# 8 million thus in year 7 the investment cash inflow

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of the equipment, which is valued at \$0.8 million. Thus, in year 7 the investment cash inflow totals \$2,800,000. Calculate the project’s NPV using a discount rate of 10 percent. CF0=-9,000,000 C01=2,000,000 F01=6 C02=2,800,000 F02=1 I=8 NPV= 1,147,364.13 Q6 P11-3 (Net present value calculation) Big Steve’s, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of \$95,000 and will generate net cash inflows of \$16,000 per year for 11 years. a. What is the project’s NPV using a discount rate of 8 percent? Should the project be accepted? Why or why not?

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b. What is the project’s NPV using a discount rate of 14 percent? Should the project be accepted? Why or why not? c. What is this project’s internal rate of return? Should the project be accepted? Why or why not? a. If the discount rate is 8 percent, then the project’s NPV is \$ 19,223.4281 The project should be accepted because the NPV is positive and therefore adds value to the firm. b. If the discount rate is 14 percent, then the project's NPV is \$ -7,756.2716 The project should not be accepted because the NPV is negative and therefore does not add value to the firm. c. This project’s internal rate of return is 12 % (CPT IRR) If the project's required discount rate is 8%, then the project should be accepted, because the IRR is higher than the required discount rate. If the project's required discount rate is 14%, then the project should not be accepted, because the IRR is lower than the required discount rate Q7 P11-9 (Related to Checkpoint11.4) (IRR calculation) Determine the internal rate of return on the following project: An initial outlay of \$10,500 resulting in a cash inflow of \$1,700 at the end of year1, \$5,200 at the end of year2, and \$7,600 at the end of year 3. This project’s internal rate of return is 14.565 % HW 8 CH 10 Con’td. Merge with what is at home Q3 P10-15 ( Related to Checkpoint 10.3 ) (Preferred stock valuation) Calculate the value of a preferred stock that pays a dividend of \$6.50 per share when the market’s required yield on similar shares is 11 percent. T he value of the preferred stock is \$ per share. Y ps = D ps r ps \$ 6.50 .11 = \$ 59. ´ 09 Q4 P11-1 (Related to Checkpoint 11.1) (Net present value calculation) Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay
of \$6,000,000 and would generate annual net cash inflows of \$1,200,000 per year for 7 years. Calculate the project’s NPV using a discount rate of 8 percent.

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