Reference no: EM132184035
Assignment
1. Compute the NPV of the following project using discount rates of 10% and 20% .
Project C0 C1 C2 C3
A -80,000 40,000 40,000 40,000
@10%
40,000(.9091) = 36,364
40,000(.8264) = 33,056 = 99,472 -80,000 = NPV=19,472
40,000(.7513) = 30,052
@ 20%
40,000(.833) = 33,320
40,000(.6944) = 27,776 = 84,244- 80,000 = NPV = 4,244
40,000(.5787) = 23,148
2. The cost of capital for a firm is 15%. Calculate the NPV of the following project. Should the firm invest in this project?
|
Year
|
Cash flow
|
|
0
|
-20,000
|
|
1
|
8,000
|
|
2
|
6,000
|
|
3
|
5,000
|
|
4
|
10,000
|
NPV@15
8,000(.8696) = 7999.1
6,000(.7561) = 4536.6
5,000(.6561) = 3287.5 =21,541- 20,000= 1,541.2
10,000(.5718) = 5718
3. You have the following information on four mutually exclusive projects with an equal life:
|
Project
|
NPV
|
IRR
|
|
A
|
$35,000
|
11%
|
|
B
|
$20,000
|
20%
|
|
C
|
$15,300
|
18%
|
|
D
|
$40,000
|
15%
|
Which project(s) should you choose?
The project that should be chosen is Project D because the NPV is the greatest compared to the others.
4. A firm is evaluating two projects X and Z. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next five years of $40,000. Assume the cost of capital of 10%. Which project(s) should the firm accept if
a) projects X and Z are independent?
If projects are independent, then Project Z would be preferred
b) projects X and Z are mutually exclusive?
If mutually exclusive, then Project Z would still be preferred because of the NPV is higher.
NPV @10%
25,000(3.791) = 94,775
-80,000 + 94,775 = 14,775
NPV @10%
40,000(3.791) = 151,640
-121,000 + 151,640 = 31,640
5. A firm is evaluating a proposal which has an initial investment of $60,000 and has cash flows of $16,000 per year for five years. Calculate the payback period of the project. If the firm's maximum acceptable payback period is 3 years, should the firm accept the project?
3+ 100,000 - 16,000- 16,000/ 16,000 =16,000
= 3+12,000/16,000
=3+ .75
=3.75
The firm must reject the proposal because the maximum acceptable payback period is within 3 years.