1. Define Internal Rate of Return (IRR). What is the assumed Net Present Value in calculating IRR?
2. Why is it not appropriate to compare today’s outflow of cash (cost of the project) directly to future cash inflows?
3. Texas Relays Track Management Firm is considering an investment of $15,000 for a new software and web system. The new system will produce the following cash inflows: Year 1 = $8,000 Year 2 = $7,000 Year 3 = $4000 Use the net present value (NPV) and IRR to evaluate the value for the rate of return of this project.
a. Determine the NPV of the project based on a 10% discount rate.
b. Determine the NPV of the project based on a 20% discount rate.
c. Determine the Internal Rate of Return for the project (using the average cash flow and the closest approx value from Appendix D).
4. Wilson Racket Company is considering the purchase of a new machine that would increase the speed of racket stringing and save considerable staffing. The net cost of this machine is $45,000. The annual cash flows have the following projections. Year Cash Flow 1 $15,000 2 20,000 3 25,000 4 10,000 5 5,000
a. If the cost of capital is 10 percent, what is the net present value of selecting a new machine?
b. What is the internal rate of return? (using the average cash flow and the closest approx value from Appendix D).
c. Should the project be accepted? Why?
5. If the Weighted Cost of Capital (WACC) is 8% and an investment option has an IRR of 5%, what does that suggest? Would you go through with the investment option?
6. Suppose you have a project with projected discounted cash flows of $5,500,000, and the project cost was $4,000,000. Would you go through with the investment option? Why or why not?