1. A firm is evaluating a proposal which has an initial investment of $50,000 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?
2. Tangshan Mining Company is considering investing in a new mining project. The firm’s cost of capital is 12 percent and the project is expected to have an initial cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $2,500,000 in year 1, $2,300,000 in year 2, $2,200,000 in year 3 and $1,000,000 in year 4
(a) Calculate the project’s NPV.
(b) Should the firm make the investment?
3. 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 9%. Which project(s) should the firm accept if
a) projects X and Z are independent?
b) projects X and Z are mutually exclusive?