A rm is evaluating an investment that costs $ 90,000

1.) A rm is evaluating an investment that costs $ 90,000 and is expected to generate annual cash ows equal to $ 20,000 for the next six years. If the rm’s required rate of return is 10 percent, what is the net present value ( NPV) of the project? What is its internal rate of return ( IRR)? Should the project be purchased?

2.) What is the traditional payback period ( PB) of a project that costs $ 450,000 if it is expected to generate $ 120,000 per year for ve years? If the rm’s required rate of return is 11 percent, what is the project’s discounted payback period ( DPB)?

3.) Compute the internal rate of return ( IRR) and the modi ed internal rate of return ( MIRR) for each of the following capital budgeting projects. The rm’s required rate of return is 14 percent. Year Project G Project J Project K 0 $( 180,000) $( 240,000) $( 200,000) 1 80,100 0 ( 100,000) 2 80,100 0 205,000 3 80,100 368,500 205,000 Which project( s) should be purchased if all are independent? Which project should be purchased if they are mutually exclusive?

4.) Following are the estimated after- tax cash ows for two mutually exclusive projects: Year Machine D Machine Q 0 ($ 32,500) ($ 29,800) 1 20,500 4,000 2 10,000 9,000 3 6,500 16,000 4 7,800 19,500 The company’s required rate of return is 16 percent. What is the internal rate of return ( IRR) of the project( s) the company should purchase?

5.) Compute the ( a) NPV, ( b) IRR, ( c) MIRR, and ( d) discounted payback for the follow-ing independent capital budgeting projects. ( r 5 9%) Year Project T Project U 0 ($ 8,000) ($ 10,000) 1 2,000 9,000 2 1,000 5,000 3 7,000 ( 3,100) Which project( s) should the company purchase? Why?6.) PowerBuilt Construction is considering whether to replace an existing bulldozer with a new model. If the new bulldozer is pur-chased, the existing bulldozer will be sold to another company for $ 85,000. The existing bulldozer has a book value equal to $ 100,000. What will be the net after- tax cash ow that is generated from the disposal of the existing bulldozer? PowerBuilt’s marginal tax rate is 35 percent.

7.) The risk- free rate of return is currently 5 percent and the market risk premium is 4 percent. The beta of a project under anal-ysis is 1.4, with expected net cash ows estimated to be $ 1,500 per year for ve years. The required investment outlay on the project is $ 4,500. What is the required risk- adjusted return on the project? Should the project be purchased?

8.) The staff of Kubrey Manufacturing has esti-mated the following net cash ows and prob-abilities for a new manufacturing process: Year Pr 5 0.1 Pr 5 0.6 Pr 5 0.3 0 ($ 120,000) ($ 120,000) ($ 120,000) 1 36,000 41,000 48,000 2 36,000 41,000 48,000 3 36,000 41,000 48,000 4 36,000 41,000 48,000 Kubrey’s required rate of return for an average risk project is 12 percent. The coef - cient of variation of Kubrey’s average project is in the range 0.5 to 0.7. If the coef cient of variation of a project being evaluated is greater than 1.0, two percentage points are added to the rm’s required rate of return. Similarly, if the coef cient of variation is less than 0.5, one percentage point is deducted from the required rate of return. ( a) If ( suppose) the project has average risk, what is its expected NPV? ( b) Based on Kubrey’s risk policy, what should be the project’s required rate of return? ( c) Should Kubrey accept or reject the project?

9.) You have been asked by the CFO of your company to evaluate the proposed acquisi-tion of a new manufacturing machine. The machine’s purchase price is $ 81,000, and it would cost another $ 12,500 to modify it so that it can be used by your rm. The machine, which falls into the MACRS 5- year class, would be sold after ve years for $ 3,000. ( See Table 10A. 2 at the end of this chapter for MACRS recovery allow-ance percentages.) Use of the machine would require an increase in net working capital ( more expensive raw materials) of $ 2,000. The machine would have no effect on revenues, but it is expected to save the rm $ 33,000 per year in before- tax operat-ing costs, mainly labor. The rm’s marginal tax rate is 35 percent, and its required rate of return for such investments is 14 percent. Should the machine be purchased?
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