Find the amount to use as the annual sales figure


1. Calculating NPV. For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 10%, should the firm accept this project? What if the return was 21 percent?

Calculating IRR. A firm evaluates all of its projects by applying the IRR rule.  If the required return is 13 percent, should the firm accept the following project?

YEAR               CASH FLOW

  0                     -$145,000

  1                          71,000

  2                          68,000

  3                          52,000 

2. Calculating IRR. What is the IRR of the following set of cash flows?

YEAR               CASH FLOW               IRR

  0                     -$32,000

  1                        13,200

  2                        18,500

  3                        10,600 

3. Problems with Profitability Index. The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects:

YEAR               CASH FLOW (1)              CASH FLOW (11)

  0                     -$72,000                        -$30,000

  1                        27,000                           9,000

  2                        32,000                          19,500

  3                        38,000                          13,500

  1. If the required return is 11 percent and the company applies the profitability index decision rule, which project should the firm accept?
  2. If the company applies the NPV decision rule, which project should it take? 
  3. Explain why your answers in (a) and (b) are different.

4. Relevant Cash Flows.  Winnebagel Corp. currently sells 28, 000 motor homes per year at $73, 000 each and 7,000 luxury motor coaches per year at $115,000 each. The company wants to introduce a new portable camper to fill its product line; it hopes to sell 23,000 of these campers per year at $19,000 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,600 units per year and reduce the sales of its motor coaches by 850 units per year. What is the amount to use as the annual sales figure when evaluating this project?  Why?

5. Calculating Project OCF.  Herrera Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $25,000, and the company expects to sell 1,400 per year. The company currently sells 1,900 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,720 units per year. The old board retails for $21,400. Variable costs are 55 percent of sales, depreciation on the equipment to produce the new board will be $1,350,000 per year, and fixed costs are $1,250,000 per year.  If the tax rate is 38 percent, what is the annual OCF for the project?

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Finance Basics: Find the amount to use as the annual sales figure
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