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Question 1: (10 points). (Net present value calculation)
Dowling Sportswear is considering building a new factory to produce aluminum
baseball bats. This project would require an initial cash outlay of $4,000,000
and would generate annual net cash inflows of $900,000 per year for 7 years.
Calculate the project’s NPV using a discount rate of 5 percent. (Round to the
nearest dollar.)
a. If the discount rate is 5 percent, then the project’s NPV
is: $
Question 2: (30 points). (Net present value calculation) Big
Steve’s, makers of swizzle sticks, is considering the purchase of a new plastic
stamping machine. This investment requires an initial outlay of $90,000 and
will generate net cash inflows of $19,000 per year for 11 years. To answer
Orange item questions, keep the text that is the best answer.
a. What is the project’s NPV using a discount rate of 7
percent? (Round to the nearest dollar.)
If the discount rate is 7 percent, then the project’s NPV
is: $
Should the project be accepted?
The project should
be or should not be accepted
because the NPV is
positive or negative and
therefore adds or subtracts value to the firm.
b. What is the project’s NPV using a discount rate of 16
percent?
If the discount rate is 16 percent, then the project’s NPV
is: $
Should the project be accepted? Why or why not?
c. What is this project’s internal rate of return? (Round to
two decimal places.)
This project’s internal rate of return is:
%
Should the project be accepted? Why or why not?
If the project’s required discount rate is 7%, then the
project should be or should not be
accepted because the IRR is higher
than or lower than the
required discount rate.
If the project’s required discount rate is 16%, then the
project should be or should not be
accepted because the IRR is higher
than or lower than the
required discount rate.
Question 3: (15 points). (Related to Checkpoint 11.2)
(Equivalent annual cost calculation) Barry Boswell is a financial analyst for
Dossman Metal Works, Inc. and he is analyzing two alternative configurations
for the firm’s new plasma cutter shop. The two alternatives that are denoted A
and B below perform the same task and although they each cost to purchase and
install they offer very different cash flows. Alternative A has a useful life
of 7 years whereas Alternative B will only last for 3 years. The after-tax cash
flows from the two projects are as follows:
a. Calculate each project’s equivalent annual cost (EAC)
given a discount rate of 10 percent. (Round to the nearest cent.)
a. Alternative A’s equivalent annual cost (EAC) at a
discount rate of 10% is: $
b. Alternative B’s equivalent annual cost (EAC) at a
discount rate of 10% is $
b. Which of the alternatives do you think Barry should
select? Why? (Select the best choice below.)
a. This
cannot be determined from the information provided.
b. Alternative
B should be selected because its equivalent annual cost is less per year than
the annual equivalent cost for Alternative A.
c. Alternative
A should be selected because its equivalent annual cost is less per year than
the annual equivalent cost for Alternative B.
d. Alternative
A should be selected because it has the highest NPV.
Question 4: (10 points). (IRR calculation) What is the
internal rate of return for the following project: An initial outlay of $9,000
resulting in a single cash inflow of $15,424 in 7 years. (Round to the nearest
whole percent.)
a. The internal rate of return for the project is: %
Question 5: (10 points). (IRR calculation) Jella Cosmetics
is considering a project that costs $750,000 and is expected to last for 9
years and produce future cash flows of $180,000 per year. If the appropriate
discount rate for this project is 17 percent, what is the project’s IRR? (Round
to two decimal places.)
a. The project’s IRR is: %
Question 6: (10 points) (IRR, payback, and calculating a
missing cash flow) Mode Publishing is considering a new printing facility that
will involve a large initial outlay and then result in a series of positive
cash flows for four years. The estimated cash flows associated with this
project are:
If you know that the project has a regular payback of 2.9
years, what is the project’s internal rate of return?
a. The IRR of the project is: %
Question 7: (15 points) (Mutually exclusive projects and
NPV) You have been assigned the task of evaluating two mutually exclusive
projects with the following projected cash flows:
If the appropriate discount rate on these projects is 11
percent, which would be chosen and why? (Round to the nearest cent.)
a. The NPV of Project A is: $
b. The NPV of Project B is: $
Which project would
be chosen and why? (Select the best choice below.)
a. Cannor
choose without comparing their IRRs.
b. Choose A
because its NPV is higher.
c. Choose
both because they both have positive NPVs.
d. Choose B
because its NPV is higher.
