Problem 1: NPV
A project has an initial cost of $52,125, expected net cash inflows of $12,000 per year for 8 years, and a cost of capital of 12%. What is the project's NPV? (Hint: Begin by constructing a time line).
Problem 2: Refer to Problem above. What is the project's IRR?
Problem 3: MIRR
Refer to Problem above. What is the project's MIRR?
Problem 4: Profitability Index
Refer to Problem above. What is the project's PI?
Problem 5: Payback
Refer to Problem above. What is the project's payback period?
Problem 6: Refer to Problem above. What is the project's payback period?
Problem 7: NPV
Your division is considering two investment projects, each of which requires an upfront expenditure of $15 million. You estimate that the investments will produce the following net cash flows:
Year Project A Project B
1 $5,000,000 $20,000,000
2 10,000,000 10,000,000
3 20,000,000 6,000,000
a. What are the two project's net present values, assuming the cost of capital is 5%?
b. What are the two project's IRRs at these same costs of capital?
Problem 8: Investment Outlay
Talbot Industries is considering an expansion project. The necessary equipment could be purchased for $9 million, and the project would also require an initial $3 million investment in net operating working capital. The company's tax rate is 40%%.
a. What is the initial investment outlay?
b. The company spent and expensed $50,000 on research related to the project last year. Would this change your answer? Explain.
c. The company plans to house the project in a building it owns but is not now using. The building could be sold for $1 million after taxes and real estate commissions. How would this affect your answer?
Problem 9: Operating Cash Flow
Cairn Communications is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information:
Projected sales $10 million
Operating costs (not including depreciation) 7 million
Depreciation 2 million
Interest expense 2 million
The company faces a 40% tax rate. What is the projects operating cash flow for the first year (t=1)?