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 13 percent, and that the maximum allowable payback and discounted payback statistic for the project are 2 and 3 years, respectively. Time 0 1 2 3 4 5 6 Cash Flow -1,110 70 530 730 730 330 730 Use the NPV decision rule to evaluate this project; should it be accepted or rejected?
a) $1,960.41, accept
b) $-527.43, reject
c) $850.41, accept
d) $752.57, accept
2. Your company has spent $260,000 on research to develop a new computer game. The firm is planning to spend $46,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,600. The machine has an expected life of 7 years, a $31,000 estimated resale value, and falls under the MACRS 10-Year class life. Revenue from the new game is expected to be $360,000 per year, with costs of $160,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 13 percent, and it expects net working capital to increase by $56,000 at the beginning of the project. What will be the net cash flow for year one of this project?
a) $131,806
b) $1,806
c) $-53,406
d) $130,000