Assignment
Question 1
Consider a project with the cash flows described below. Assume 11% cost of capital.
|
Year
|
Cash Flow
|
|
0
|
-150,000
|
|
1
|
20,000
|
|
2
|
30,000
|
|
3
|
40,000
|
|
4
|
40,000
|
|
5
|
30,000
|
|
6
|
20,000
|
a) What is the present worth (NPV) of the project? Using the present worth (NPV) rule, should the project be accepted? Why?
b) What is the internal rate of return (IRR) of the project? Using the IRR rule, should the project be accepted? Why?
Question 2
Use the EXTERNAL RATE OF RETURN method to answer this question. Assume 15% cost of capital. Consider a project with the cash flows described below, and assume the REINVESTMENT rate is equal to 10% (project's cash flows can be re- invested at 10%). Should the project be accepted? Why?
|
Year
|
Cash Flow
|
|
0
|
-300,000
|
|
1
|
140,000
|
|
2
|
100,000
|
|
3
|
70,000
|
|
4
|
50,000
|
|
5
|
40,000
|
|
6
|
40,000
|
Question 3
Consider the two mutually exclusive projects described below.
a) Assuming the cost of capital is 9%, should either of the two projects be accepted? Why?
b) Assuming the cost of capital is 16%, should either of the two projects be accepted? Why?
c) For all positive values of the cost of capital, divide the cost of capital in ranges with different decisions, describe and discuss what decision would be made in each range and why. Include an NPV profile chart to illustrate your answer.
|
Year
|
Cash Flow Project A
|
Cash Flow Project B
|
|
0
|
-450,000
|
-700,000
|
|
1
|
200,000
|
200,000
|
|
2
|
150,000
|
200,000
|
|
3
|
100,000
|
200,000
|
|
4
|
100,000
|
200,000
|
|
5
|
75,000
|
200,000
|
Question 4
A chocolate company is deciding between two chocolate machines, with unequal lives - machine A lasts 4 years, while machine B only lasts 3 years. The choice has no impact on company's revenues. Assume repeatability, and 15% cost of capital. The annual costs for each machine are described below.
|
Year
|
Cash Flow Machine A
|
Cash Flow Machine B
|
|
0
|
-180,000
|
-150,000
|
|
1
|
-25,000
|
-20,000
|
|
2
|
-30,000
|
-25,000
|
|
3
|
-35,000
|
-30,000
|
|
4
|
-40,000
|
N/A
|
Determine which machine should be picked, and explain why, using
a) The equivalent annuity approach.
b) The common denominator approach.
Question 5
XYZ Steel Corporation is deciding whether to expand operations. The expansion would require purchasing a new machine for $500,000, with additional $30,000 shipping and installation fees. The machine will be depreciated using a 7-year recovery period (use the percentages given in table 7-3 in the textbook). This project is expected to last 6 years, and the machine is expected to be sold for $200,000 at the end of year 6. In each of the six years of the project (years 1-6) there will be additional revenues of $125,000, and additional expenses of $45,000. Assume 35% tax rate, and 12% cost of capital.
a) Calculate after-tax annual cash flows from the project for years 0-6.
b) Calculate the NPV and the IRR of the project, determine whether it should be accepted, and explain why.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.