1. Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable pay back and discounted payback statistic for the project are 2.5 and 3.5 years, respectively.
|
Time
|
Cash Flow
|
|
0
|
-250,000
|
|
1
|
60,000
|
|
2
|
80,000
|
|
3
|
140,000
|
|
4
|
120,000
|
|
5
|
80,000
|
a. Use the IRR AND MIRR decision rule to evaluate this project; should it be accepted or rejected?
b. Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
c. Use the PB and DPB decision rule to evaluate this project; should it be accepted or rejected?
(In this question, the cash flow is a normal cash flow. Think about that what is the year 2's cash for changes to (-80,000). Which measures can be used and which cannot?(normal and non normal cash flows)
2. You are evaluating the proposed acquisition of a machine that costs $220,00. The machine will result in increased sales of $120,000 per year for 3 years, but costs will increase by $25,000 per year. The machine will be depreciated 3 years in straight- line method and will be sold for and estimated $50,000 after 3 years. NWC will increase by $75,000 and remain constant for the life of the project. The firm's tax rate is 40 percent and discount rate is 9 percent. Calculate the project's cash flows and the NPV of the project.