Problem 1 - NPV and IRR: Unequal Annual Net Cash Inflows
Assume that Goodrich Petroleum Corporation is evaluating a capital expenditure proposal that has the following predicted cash flows:
Initial investment Operation - $(82,850)
Year 1 - 30,000
Year 2 - 50,000
Year 3 - 40,000
Salvage - 0
Required - Using a discount rate of 12 percent, determine the net present value of the investment proposal.
Problem 2- NPV and IRR: Equal Annual Net Cash Inflows
Apache Junction Company is evaluating a capital expenditure proposal that requires an initial investment of $9,350, has predicted cash inflows of $2,000 per year for 15 years, and has no salvage value.
Required
a. Using a discount rate of 14 percent, determine the net present value of the investment proposal.
b. Determine the proposal's internal rate of return.
c. What discount rate would produce a net present value of zero?
Problem 3 - Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value
Presented is information pertaining to the cash flows of three mutually exclusive investment proposals:
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Proposal A
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Proposal B
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Proposal C
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Initial investment
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$45,000
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$45,000
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$45,000
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Cash flow from operation
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Year 1
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40,000
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22,500
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45,000
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Year 2
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5,000
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22,500
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Year 3
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22,500
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22,500
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Disinvestment
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0
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0
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0
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Life (years)
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3 years
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3 years
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3 years
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Required - Rank these investment proposals using the payback period, the accounting rate of return on initial investment, and the net present value criteria. Assume that the organization's cost of capital is 12 percent. Round calculations to four decimal places.