1. Find the net present value (NPV) and profitability index (PI) of a project that costs $1,500 and returns $800 in year one and $850 in year two. Assume the project's cost of capital is 8 percent.
2. Find the NPV and PI of an annuity that pays $500 per year for eight years and costs $2,500. Assume a discount rate of 6 percent.
3. Find a project's IRR that returns $17,000 three years from now if it costs $12,000.
4. Find a project's IRR and M1RR If it has estimated cash flows of $5,500 annually for seven years if its year-zero investment is $25,000 and the firm's minimum required rate of return on the project is I0, percent.
5. For the following projects, compute NW, IRR, killtR, PI, and payback. If these projects are mutually exclusive, which one(s) should be done? If they are independent, which one(s) should be undertaken?
A 8
Year 0 -1,000 -1,500 -500 -2,
Year 1 400 500 100 600
Year 2 400 500 300 800
Year 3 400 700 250 200
Year 4 400 200 200 300
Discount rate 10% 12% 15% 8%
6. The Sanders Electric Company is evaluating two projects for possible inclusion in the firm's capital budget. Project M will require a $37,000 investment while project 0's investment will be $46,000. After-tax cash inflows are estimated as follows for the two projects:
YEAR PROJECT PI PROJECT 0
$12,000 $10.000
2 12,000 10,000
3 12,000 15,000
4 12,000 15,000
5 15,000
a. Determine the payback period for each project
b. Calculate the NPV and PI for each project based on a 10 percent cast of capital. Which, if either, of the projects is acceptable?
c. Determine the IRR and M1RR for Projects M and 0.
7. AA Auto Parts Company has a corporate tax rate of 34 percent and depreciation of $19,180. Compute its depreciation tax shield.
8. A project is estimated to generate sales revenue of $10 million with expenses of $9 million. No change in net working capital is expected. Marginal profits will be taxed at a 35 percent rate. lithe project's operating cash flow is $1 million, what is the project's depreciation expense? Its net income?
9. Compute operating cash flows for the following:
a. A project that is expected to have sales of $10,000, expenses of $5,000, depreciation of $200, an investment of $50 in net working capital, and a 20 percent tax rate.
b. A project has the simplified project income statement below. In addition, assume the project will require a $75 investment in net working capital.
Sales
$925.00
-Costs -315.00
-Depreciation -100.00
EBIT=EBT 510.00
-Taxes (at 34%) -173.40
Net Income 336.60
c. For a capital budgeting proposal, assume this year's cash sales are forecast to be $220, cash expenses $130, and depreciation $80. Assume the firm is in the 30 percent tax bracket.
10. A machine can be purchased for $10,500, including transporta¬tion charges, but installation costs will require $1,500 more. The machine is expected to last four years and produce annual cash reve¬nues of $6,000. Annual cash operating expenses are expected to be $2,000, with depreciation of $3,000 per year. The firm has a 30 percent tax rate. Determine the relevant after-tax cash flows and prepare a cash flow schedule.
I. Use the information in Problem 10 to do the following: a. Calculate the payback period for the machine.
II. If the project's cost of capital is 10 percent, would you recommend buying the machine?
III. Estimate the IRR for the machine.
12. The Brassy Fin Pet Shop is considering an expansion. Construction will cost $90,000 and will be depreciated to zero, using straight-line depreciation, over five years. Earnings before depreciation are expected to be $20,000 in each of the next five years. The firm's tax rate is 34 percent.
a. What are the project's cash flows?
b. Should the project be undertaken if the firm's cost of capital is 11 percent?
13. The following is a simplified project annual income statement for Ma & Pa Incorporated for each year of an eight-year project. Its upfront cost is $2,000. Its cast of capital is 12 percent.
Sales
$925.00
less cash expenses 310.00
less depreciation 250.00
Earnings before taxes $365.00
Less taxes (at 35%) 127.75
Net income $237.25
a. Compute the project's after-tax cash flow.
b. Compute and interpret the project's NPV IRA, profitability index, and payback period.
14. Challenge Problem Annual savings from Project X include a reduction of ten clerical employees with annual salaries of $15,000 each, $8030 from reduced production delays, $12,000 from lost sales due to inventory stock-outs, and $3,000 in reduced utility costs. Project X costs $250,000 and will be depreciated over a five-year period using straight-line depreciation. Incremental expenses of the system include two new operators with annual salaries of $40,000 each and operatingexpenses of $12,000 per year. The firms' tax rate is 34 percent
a. Find Project X's initial cash outlay.
b. Find the project's operating cash flows over the five-year period.
c. If the project's required return is 12 percent, should it be implemented?