For Putul

Directions for Discussion Questions:

 

(10.2) I would recommend using the NPV function in Excel or a financial calculator. Note that the NPV function in Excel takes the PV of cash flows from an investment. You must subtract the cost of the investment to arrive at the NPV. For 10.2, you will have:

= NPV(15%,814332,863275,937250,1017112,1212960,1225000) – 4133250.

You can simplify this considerably by entering the cash flows and referring to the relevant cells.

(10.7) Use the expression for Payback period.

(10.28) Use NPV formula discussed in 10.2 above. Which project should be accepted? Explain.

(10.32) In addition to calculating the NPV for the two projects, you may wish to use the IRR function in Excel or a financial calculator. You will compare the IRR for each project to the required rate of return (cost of capital). Note that the IRR function in Excel takes into account the cost of the investment (first argument; negative cash flow). Which project should be accepted? Please state this in your answer, with a short explanation.

Net present value: The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1, 223,445, $2,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the firm is 13 percent, what is the NPV of this project?

Payback: Elmer Sporting Goods is getting ready to produce a new line of gold clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $812,500, and 1,200,000 over the next three years. What is the payback period for this project?

Internal rate of return: Quick Sale Real Estate Company is planning to invest in a new development. The cost of the project will be $23 million and is expected to generate cash flows of $14,000,000, $11,750,000, and $6,350,000 over the next three years. The company’s cost of capital is 20 percent. What is the internal rate of return on this project? (Round to the nearest percent.)

Problem 10.42 An investment of $98 generates after-tax cash flows of $37 in Year 1, $86 in Year 2, and $121 in Year 3. The required rate of return is 20 percent. The net present value is closest to

Given the following cash flows for a capital project, calculate the NPV and IRR. The required rate of return is 8 percent.

Year
0	1	2	3	4	5
Cash Flows	$-46904	$11330	$11675	$23308	$8899	$4232

2

>Problem

1 0

.2

Discussion Questions

		Session	6

10.2 Net present value: Kingston, Inc., is looking to add a new machine at a cost of $

4

,1

3

3,2

5

0. The company expects this equipment will lead to cash flows of $814,322, $863,2

7

5, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment?

Problem 10.7

Session 6 Discussion Questions

10.7 Payback: Quebec, Inc., is purchasing machinery at a cost of $3,768,966. The company expects, as a result, cash flows of $979,225, $1,158,886, and $1,881,497 over the next three years. What is the payback period?

Problem 10.28

Session 6 Discussion Questions

0

1

2

3

4

5

6

7

	Year		Project 1		Project 2
($8,425,375)	($11,368,000)
$3,225,997	$2,112,589
$1,775,882	$3,787,552
$1,375,112	$3,125,650
$1,176,558	$4,115,899
$1,212,645	$4,556,424
$1,582,156
$1,365,882

10.28 Draconian Measures, Inc., is evaluating two independent projects. The company uses a 13.8 percent discount rate for such projects. Cost and cash flows are shown in the table. What are the NPVs of the two projects?

Problem 10.32

Session 6 Discussion Questions
Year Project 1 Project 2

0

($1,250,000)

1

2 $350,000 $350,000
3

$350,000

4

$350,000

5

$350,000

	($1,250,000)
$250,000						$350,000
$450,000
$500,000
$750,000

10.32 Jekyll & Hyde Corp. is evaluating two mutually exclusive projects. Their cost of capital is 15 percent. Costs and cash flows are given in the following table. Which project should be accepted? Calculate NPV and IRR to formulate your decision.