Question 1 : Net Present Value: Kingston, Inc., is looking to add a new machine at a cost of $4,133,250. The company expects this equipment will lead to cash flows of $814,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment?
Question 2 : Payback: Quebec, Inc., is purchasing machinery at a cost of $3,768,966. The company expects, as a result, cash flows of $979,225, $1,158,886, and $1,881,497 over the next three years. What is the payback period?
Question 3 : Net Present Value: Draconian Measures, Inc., is evaluating two independent projects. The company uses a 13.8 percent discount rate for such projects. Cost and cash flows are shown in the table. What are the NPVs of the two projects?
| Year |
Project 1 |
Project 2 |
| 0 |
($8,425,375) |
($11,368,000) |
| 1 |
$3,225,997 |
$2,112,589 |
| 2 |
$1,775,882 |
$3,787,552 |
| 3 |
$1,375,112 |
$3,125,650 |
| 4 |
$1,176,558 |
$4,115,899 |
| 5 |
$1,212,645 |
$4,556,424 |
| 6 |
$1,582,156 |
|
| 7 |
$1,365,882 |
|
Question 4 : Net Present Value & IRR: Jekyll & Hyde Corp. is evaluating two mutually exclusive projects. Their cost of capital is 15 percent. Costs and cash flows are given in the following table. Which project should be accepted? Calculate NPV and IRR to formulate your decision.
| Year |
Project 1 |
Project 2 |
| 0 |
($1,250,000) |
($1,250,000) |
| 1 |
$250,000 |
$350,000 |
| 2 |
$350,000 |
$350,000 |
| 3 |
$450,000 |
$350,000 |
| 4 |
$500,000 |
$350,000 |
| 5 |
$750,000 |
$350,000 |
Question 5 : Comparing capital budgeting tools: Capital budgeting analysis of mutually exclusive projects A and B yields the following. What project should management choose? Explain why.
| |
Project A |
Project B |
| IRR |
19.00% |
24.00% |
| NPV |
$385,000 |
$350,000 |
| Payback Period |
2.8 years |
2.2 years |