Question 1: The Tiger Company has an opportunity to make an investment with the subsequent estimated after tax cash flows:-
Year ATCE
0 -10,000,000
1 2,000,000
2 2,000,000
3 2,500,000
4 3,500,000
5 600,000
6 5,000,000
Question 2:
The company's required rate of return on such investments id 10%.
(A) Determine payback period, internal rate of return (IRR), net present value (NPV), and profitability index (PI) for this investment?
(B) What is the IRR, and what is its relationship to the NPV and the PI?
(C) Which of the two approaches future value or present value does a financial manager rely on most often? Why?
(2) Two mutually exclusive projects have projected cash flows as follows:
Years Project A Project B
0 -800 -800
1 400 0
2 400 0
3 400 1324
(a) Determine the net present value of each project at a discount rate of 10%.
(b) Evaluate the internal rate of return for each project.
(c) Graphically show the present value profile of the two projects.
(d) Which project would you select? Why? What assumptions are inherent in your decision?
Question 3: The Buccaneer Corporation is considering replacement of its old, fully depreciated computer. Two new models are available. Computer A has a cost of $108,300 a five years expected life, and after tax cash flows of $29,100 per year. Computer B has a cost of $172,000, a ten-year life, and after tax cash flows of $31,700 per year. No new technological developments are expected, but computer prices are falling because of competition from imports. In five years, computer prices are expected to be 25% less than current prices. The cost of capital is 12%. If the replacement is to be made, it have to be done now. Should the company make the replacement, and if so, with A or B? Why?
(i) Show cash flow time lines for Computer A and Computer B.
(ii) Determine the NPV's on Computer A and Computer B.
(iii) On the basis of their respective NPV's should the company invest in Computer A or Computer B?
(v) Is there anything that you will identify that may cause some difficulty in making this decision based on the Internal Rates of Return (IRR'S0.
Question 4: On completion of MBA, Eddie and Mike were so pleased with the amount of useful and interesting knowledge that they had learned that they convinced some friends who are wealthy alums to prepare a scholarship. The scholarship will allow three needy students to take the courses in perpetuity. The annual cost of tuition and books for the course is $2000. The university will earn 6% on the fund. The scholarship will be created by a single payment to the university from their friends.
A- How large must the payment be to fund the scholarship?
B- What amount would be needed if the university could earn 9% rather than 6% per year on the funds?
Question 5: The Bulldog Company can purchase a Tractor for a $14,000 initial investment. The tractor will generate annual after-tax cash inflows of $4, 000 for the next 4 years.
A- What is the Net Present Value (NPV) of the asset if the company's required rate of return on such assets is 10%?
B- What would the maximum required rate of return (closet whole-percentage rate) that the firm can have and still accept the asset? Discuss this finding in light of your response to A. above.