FINC3155-Business Finance

FINC3155-Business Finance

Homework 9

1. Compute the NPV of the following project using discount rates of 10% and 20% .

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Project C0 C1 C2 C3

A -80,000 40,000 40,000 40,000

@10%

40,000(.9091) = 36,364

40,000(.8264) = 33,056 = 99,472 -80,000 = NPV=19,472

40,000(.7513) = 30,052

@ 20%

40,000(.833) = 33,320

40,000(.6944) = 27,776 = 84,244- 80,000 = NPV = 4,244

40,000(.5787) = 23,148

2. The cost of capital for a firm is 15%. Calculate the NPV of the following project. Should the firm invest in this project?

YearCash flow
0-20,000
18,000
26,000
35,000
410,000

NPV@15

8,000(.8696) = 7999.1

6,000(.7561) = 4536.6

5,000(.6561) = 3287.5 =21,541- 20,000= 1,541.2

10,000(.5718) = 5718

3. You have the following information on four mutually exclusive projects with an equal life:

ProjectNPVIRR
A$35,00011%
B$20,00020%
C$15,30018%
D$40,00015%

Which project(s) should you choose?

The project that should be chosen is Project D because the NPV is the greatest compared to the

others.

4. A firm is evaluating two projects X and Z. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next five years of $40,000. Assume the cost of capital of 10%. Which project(s) should the firm accept if

a) projects X and Z are independent?

If projects are independent, then Project Z would be preferred

b) projects X and Z are mutually exclusive?

If mutually exclusive, then Project Z would still be preferred because of the NPV is higher.

NPV @10%

25,000(3.791) = 94,775

-80,000 + 94,775 = 14,775

NPV @10%

40,000(3.791) = 151,640

-121,000 + 151,640 = 31,640

5. A firm is evaluating a proposal which has an initial investment of $60,000 and has cash flows of $16,000 per year for five years. Calculate the payback period of the project. If the firm’s maximum acceptable payback period is 3 years, should the firm accept the project?

3+ 100,000 – 16,000- 16,000/ 16,000 =16,000

= 3+12,000/16,000

=3+ .75

=3.75

The firm must reject the proposal because the maximum acceptable payback period is within 3 years.

 
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