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- From: Finance,
- Posted on: Fri 04 Oct, 2013
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Please answer each of the seven (7) practice problems below. Also, please also show as much of your solution steps as is feasible in the space provided beneath each problem. Please be sure to round your answers to **two** (**2**) **decimal** **places**; also, note that for problems dealing with a percentage answer such as the internal rate of return (IRR), your calculator should be set to **four** (**4**) **decimal** **places** so that after converting your answer to percentage terms your final solution will be rounded to two places.

1. An investment project requires a net investment of $100,000 today. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the internal rate of return for the project (to the nearest tenth of one percent). Should the project be accepted or rejected?

2. An investment project requires a net investment of $100,000 and is expected to generate annual net cash inflows of $25,000 for 6 years. The firm's cost of capital is 12 percent. Determine the profitability index for this project.

3. A project requires a net investment of $450,000. It has a profitability index of 1.25 based on the firm's 12 percent cost of capital. Determine the net present value of the project.

4. Would you invest in a project that has a net investment of $14,600 today and a single net cash flow of $24,900 in 5 years, if your required rate of return was 12 percent? In providing your answer, you must present the NPV along with your decision to accept/reject.

5. Using the profitability index, which of the following mutually exclusive projects should be accepted? In providing your answer, you must present the profitability index (PI) along with your decision to accept/reject.

Project A: NPV = $6,000; PV of outflows = $50,000

Project B: NPV = $10,000; PV of outflows = $120,000

Project C: NPV = $8,000; PV of outflows = $80,000

6. A company is considering adoption of a new project requiring a net investment of

$10 million. The project is expected to generate 5 years of net cash inflows of $5 million per

year (assume that each of the net cash inflows occur at the end of each year). At the end of the

the project's sixth, and final year, it is expected to have a net cash outflow of $1 million

as the company will need to restore the site of the project to its original condition. What is the

project's net present value, using a discount rate of 12 percent?

7. A firm is considering the following mutually exclusive projects:

Project A Project B

Year Cash Flow Cash Flow

0 -$5,000 -$5,000

1 200 3,000

2 800 3,000

3 3,000 800

4 5,000 200

At what cost of capital will the net present value of the two projects be the same? (That is, what is the “crossover” rate?)

Solution Description

A+++++++++