Description
Problem 1
Suppose a
company is considering two investment projects. Both projects require an
upfront expenditure of $30 million. The company estimates that the cost of
capital is 10% and that the investments will result in the following after-tax
cash flows (in millions of dollars). Complete parts (a) through (e) below.
Year |
Project A |
Project B |
1 |
$28 |
$10 |
2 |
$20 |
$15 |
3 |
$10 |
$20 |
4 |
$5 |
$25 |
a) Find the regular payback
period for each project.
b) Find the discounted
payback period for each project.
c) Assume that the two
projects are independent and the cost of capital is 10%. Which project or
projects should the company undertake? Base your results on the NPV and show
the NPVs.
d) Assume that the two
projects are mutually exclusive and the cost of capital is 5%. Which project or
projects should the company undertake? Base your results on the MIRR and show
the MIRRs.
e) Explain why quantitative
measures may not always be the best way to evaluate a project.
Problem 2
A shellfish processing company is
thinking about purchasing a new clam digger for $14,000. The expected net cash
flows resulting from the digger are $9,000 in year 1, $7,000 in the 2nd year,
$5,000 in the 3rd year, and $3,000 in the 4th year. Should the company purchase
this digger if its cost of capital is 12 percent? In providing your answer, you must present
the NPV along with your decision to accept/reject.
Problem 3
What is the
internal rate of return for a project that has a net investment of $60,000 and
the following net cash flows: Year 1 = $15,000; Year 2 = $20,000; Year 3 =
$25,000; Year 4 = $30,000 (You may find Excel or a financial calculator useful
to solve this problem)?
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