Question 1: Project K has a cost of $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its cost of capitol is 12 percent. ( Begin By constructing a timeline.)
a) What is the project's payback period (to the closest year)?
b) What is the project's discounted payback period?
c) What are the project's NVP?
d) What is the project's IRR?
e) What is the project's MIRR?
Question 2: Your division is considering two investment projects, each of which requires an upfront expenditure of $15, million. You estimate that the investment will produce the following net cash flows:
Year Project A Project B
1 $5,000,000 $20,000,000
2 10,000,000 10,000,000
3 20,000,000 6,000,000
What are the two projects' net present values, assuming the cost of capitol is 10 percent? 5 percent? 15 percent?
The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $108,000, and it would cost another $12,500 to modify it for special use by your firm. The machine falls into the MACRS 3 year class, and it would be sold after 3 years for $65,000. The machine would require an increase in net working capitol (inventory) of $5,500. The milling machine would have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs mainly labor. Campbell's marginal tax rate is 35 percent.
a) What is the net cost of the machine for capitol budgeting purposes? (That is what is the year 0 net cash flow?)
b) What are the net operating cash flows in years 1, 2, and 3?
c) What is the terminal year cash flow?
d) If the project's cost of capitol is 12 percent should the machine be purchased?