Question 1

Briarcliff Stove Company is considering a new product line to supplement its range line.
It is anticipated that the new product line will involve cash investment of $9000 at time 0 and cash inflows of
5000,4000,3000 in coming three years respectively the company prefers to be conservative and end all calculations
at that time. Assume cash flows occurs unevenly during the year. If the required rate of return is 15 percent, what is
the net present value, payback period and PI of the project? Is it acceptable from NPV point of view?

Question 2
Alpha Company is considering a new product line to supplement its range line.
It is anticipated that the new product line will involve cash investment of $12000 at time 0 and cash inflows of
5000,5000,8000 in coming three years respectively. The company prefers to be conservative and end all calculations
at that time. Assume cash flows occurs unevenly during the year. If the required rate of return is 15 percent, what is
the net present value, pay back period and PI of the project?Is it acceptable from NPV point of view?

Question 2
Can you criticize on pay back period on question above?

Question 3
A) You are undertaking a project which requires an initial investment of $1000. Project life is considered to be
10 years. cash flows of $2000 will occur at the end of 10 th year. What should be the IRR?
Hint (7%-7.20%)

B) You are undertaking a project which requires an initial investment of $1000. Return of $500 is expected at
the end of each next 3 years. What should be the IRR? Hint (23%-23.40%)

C) You are undertaking a project which requires an initial investment of $1000. Return of $900, 500, 100 is
expected at the end of each next 3 years. What should be the IRR? Hint (33%-33.20%)

D) You are undertaking a project which requires an initial investment of $1000. Return of $130 is expected
forever (perpetuity). What should be the IRR?
Question 4
Two mutually exclusive projects have projected cash flows as follows:
END OF YEAR
0 1 2 3 4
Project A $2,000 $1,000 $1,000 $1,000 $1,000
Project B $$$ 2,000 0 0 0 6,000
a. Determine the internal rate of return for each project.
b. Determine the net present value for each project at discount rates of 0, 5, 10, 20, 30, and 35 percent.
c. Which project would you select? Why? What assumptions are inherent in your decision?

Question 5
Zaire Electronics can make either of two investments at time 0. Assuming a required rate
of return of 14 percent, determine for each project (a) the payback period, (b) the net
present value, (c) the profitability index, Assume depreciation is charged at straight line basis. And that the
corporate tax rate is 34 percent. The initial investments required and yearly savings before depreciation and
taxes are shown below:

END OF YEAR
PROJECT INVESTMENT 1 2 3 4 5 6 7
A $28,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000
B 20,000 5,000 5,000 6,000 6,000 7,000 7,000 7,000
Question 6
Thoma Pharmaceutical Company may buy DNA testing equipment costing $60,000. This
equipment is expected to reduce labor costs of clinical staff by $20,000 annually. The equipment has a useful life of
five years .Depreciation will be charged on reducing balance method with a percentage of 20%. Salvage value of
$19660.8 is expected at the end. The corporate tax rate for Thoma is 38 percent (combined federal and state), and its
required rate of return is 15 percent. On the basis of this information, what is the net present value of the project? Is
it acceptable?

Question 7
In Problem 6, suppose that 6 percent inflation in cost savings from labor is expected over
the last four years, so that savings in the first year are $20,000, savings in the second year
are $21,200, and so forth. If the required rate of return is still 15 percent, what is the net present value of the
project? Is it acceptable?
A) If a working capital requirement of $10,000 were required in addition to the cost of
the equipment and this additional investment were needed over the life of the project,
what would be the effect on net present value if it is recovered at the end of project life? (All other things are the
same as in Problem 7, Part (a).

Question 8
The Lake Tahow Ski Resort is comparing a half dozen capital improvement projects. It has
allocated $1 million for capital budgeting purposes. The following proposals and associated
profitability indexes have been determined. The projects themselves are independent of
one another.
PROFITABILITY
PROJECT AMOUNT INDEX
1. Extend ski lift 3 $500,000 1.22
2. Build a new sports shop 150,000 0.95
3. Extend ski lift 4 350,000 1.20
4. Build a new restaurant 450,000 1.18
5. Build addition to housing complex 200,000 1.19
6. Build an indoor skating rink 400,000 1.05
A) If strict capital rationing for only the current period is assumed, which of the investments
should be undertaken? (Tip: If you didn’t use up the entire capital budget, try
some other combinations of projects, and determine the total net present value for
each combination.).
B) Is this an optimal strategy?

Question 9
The City of San Jose must replace a number of its concrete mixer trucks with new trucks.
It has received two bids and has evaluated closely the performance characteristics of the
various trucks. The Rockbuilt truck, which costs $74,000, is top-of-the-line equipment.
The truck has a life of eight years, assuming that the engine is rebuilt in the fifth year.
Maintenance costs of $2,000 a year are expected in the first four years, followed by total
maintenance and rebuilding costs of $13,000 in the fifth year. During the last three years,
maintenance costs are expected to be $4,000 a year. At the end of eight years the truck
will have an estimated scrap value of $9,000.
A bid from Bulldog Trucks, Inc., is for $59,000 a truck. Maintenance costs for the truck
will be higher. In the first year they are expected to be $3,000, and this amount is expected
to increase by $1,500 a year through the eighth year. In the fourth year the engine will need
to be rebuilt, and this will cost the company $15,000 in addition to maintenance costs in
that year. At the end of eight years the Bulldog truck will have an estimated scrap value
of $5,000.
a. If the City of San Jose’s opportunity cost of funds is 8 percent, which bid should it
accept?