1. Below are the cash flows for two mutually exclusive projects.

year X Y
0 (5,000) (5,000)
1 2,000 0
2 2,000 0
3 2,000 0
4 2,000 9,500

A. Compute for the Payback period of X and Y (1pt each) 2.5 years/ 3.53 years
B. If the cost of capital for both projects is 14%. Which project should be selected? (2pts) X
C. If we have a scrap value of 1,000 each for the investment, what is the bailout period?
(2pts each) 2 years/ 3.42 years

2. Cash flows for two mutually exclusive projects are shown below:

year A B
0 (100) (100)
1 10 70
2 60 50
3 80 20

Both projects have a cost of capital of 10%.

A. Calculate the NPV for both projects. (2pts each) 18.78 / 19.98
B. Calculate the IRR for both projects. (2pts each) 16.5% / 16.9%

3. E company is considering two projects, C & D, with cash flows as shown below:

period C D
0 -50,000 -100,000
1 20,000 60,000
2 20,000 25,000
3 20,000 25,000
4 20,000 25,000

The opportunity cost of capital for C is 14 percent. The opportunity cost of capital for D is 10
percent.

A. Calculate the NPV for each project. (2pts each) 8,274 / 11,065
B. Calculate the IRR for each project. (2pts each) 21.86% / 16.08%

4. F company is considering a project which has an up-front cost paid today at t = 0. The
project will generate positive cashflows of $60,000 a year at the end of each of the next
five years. The project's NPV is $75,000 and the company's WACC is 10 percent. What
is the project's simple, regular payback? (5pts) 2.54 years
5. Lloyd Enterprises has a project which has the following cash flows:
Year Cash Flow
0 -$200,000
1 50,000
2 100,000
3 150,000
4 40,000
5 25,000
The cost of capital is 10 percent. What is the project's discounted payback? (5pts) 2.64
years
6. Davis Corporation is faced with two independent investment opportunities. The
corporation has an investment policy which requires acceptable projects to recover all
costs within 3 years. The corporation uses the discounted payback method to assess
potential projects and utilizes a discount rate of 10 percent. The cash flows for the two
projects are:
Project A Project B
Year Cash Flow Cash Flow
0 -$100,000 -$80,000
1 40,000 50,000
2 40,000 20,000
3 40,000 30,000
4 30,000 0
Which investment project(s) does the company invest in? (5pts)
7. With an Investment of 100,000 and you expect to receive 20,000 for…8 years.
A. What is the IRR? (2pts) 11.82%
B. 9 years. What is the IRR? (2pts) 13.71%

8. A company has determined that its optimal capital structure consists of 40 percent debt
and 60 percent equity.Given the following information, calculate the firm's weighted
average cost of capital. (3pts)

Rd= 6% Tax rate=40% P=$25 Growth=0% D= $2.00

3.6% 8% / 1.44% + 4.8% = 6.24%

9. M Corporation's common stock is currently selling for $50 per share. The current
dividend is $2.00 per share.If dividends are expected to grow at 6 percent per year, then
what is the firm's cost of common stock? (3pts)

10%

10. Johnson Industries finances its projects with 40 percent debt, 10 percent preferred stock,
and 50 percent common stock.•The company can issue bonds at a yield to maturity of
8.4 percent.•The cost of preferred stock is 9 percent.•The company's common stock
currently sells for $30 a share.•The company's dividend is currently $2.00 a share, andis
expected to grow at a constant rate of 6 percent per year.•Assume that the flotation cost
on debt and preferred stock is zero,and no new stock will be issued.•The company’s tax
rate is 30 percent.What is the company’s weighted average cost of capital (WACC)?
(5pts)

5.88% 9% 12.67% / 2.35% .9% 6.34% 9.59%

11. B Company makes and sells two products, Olives and Popeyes. The income statement
for the prior year, 2001, was as follows:

Olives Popeyes
Sales 16,000 24,000
Variable cost of goods sold 6,000 10,000
Manufacturing contribution margin 10,000 14,000
Fixed production 5,000 7,000
Variable selling and administration 2,000 5,000
Fixed selling and administration 1,000 3,000
Net income 2,000 (1,000)

B's fixed costs are unavoidable and are allocated to products on the basis of sales
revenue. If Popeyes are dropped, sales of Olives are expected to increase by 40 percent
next year.

A. Should we dropped Popeye? What would be the effect? (5pts) No. Incremental 3,000