1) You are looking at three mutually exclusive projects. All three projects have 3 years life span and require the same $20,000 initial investment. Project A is expected to generate $20,000, $2,000, and $2,000 in the next three years. Project B will generate $8,000 a year for the next three years. Expected future cash flows for project C is $2,000, $2,000 and $24,000 in the next three years. Which one of the following statements is correct?
A. If the discount rate is 6%, we should accept project A.
B. Project A is the best project because it has the highest IRR among the three projects.
C. Higher discount rate will eventually make project A more appealing because riskier projects should favor quicker payback.
D. Higher discount rate will eventually make project B more appealing because stable future cash flows makes the project safer.
E. Higher discount rate will eventually make project C more appealing because project C produces the highest total amount of future cash flows.
2) Thornley Machines is considering a 3-year project with an initial cost for fixed assets of $618,000. The project will reduce operating costs by $265,000 a year. The equipment will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the equipment will be sold for an estimated $60,000. The tax rate is 34 percent. The project will require $23,000 in extra inventory over the project's life. What is the NPV if the discount rate assigned to the project is 14 percent?
A. -$2,646.00
b. -$30,086.23
C. -$32,593.78
D. $43,106.54
E. $16,884.40
3) Jackson amp; Sons uses packing machines to prepare its products for shipping. One machine costs $178,000 and lasts about 5 years before it needs replaced. The operating cost per machine is $16,000 a year. What is the equivalent annual cost of one machine if the required rate of return is 12 percent?
A. $38,556.67
B. $65,378.93
C. $79,004.12
D. $81,006.15
E. $54,224.08
4) The Quorum Company has a prospective 6-year project that requires initial fixed asset costing $962,000, annual fixed costs of $403,400, variable costs per unit of $123.60, a sales price per unit of $249, a discount rate of 14 percent, and a tax rate of 35 percent. What is the present value break-even point in units per year?
A. 6,081
B. 4,995
C. 5,563
D. 6,144
E. 5,852