1. A project has and initial cost of $32,000, expected net cash inflows of $9,500 per year for 7 years, and a cost of capital of 10%.

a. What is the projects NPV?

b. What is the projects IRR?

c. What is the projects payback period?

2. Your division is considering two investment projects, each of which requires an up-front expenditure of $20 million. You estimate that the investments will produce the following net cash flows:

YearProject AProject B

1$5,000,000$20,000,000

210,000,00010,000,000

320.000.0006,000,000

a. What are the two projects NPVs assuming the cost of capital is 8%, 14%, 20%?

b. What are the two projects IRRs at those same costs of capital?

3. Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate, it will cost $23,000, whereas the gas-powered truck will cost $14,500. The cost of capital that applies to both investments is 13%. The life cycle for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,200 per year and those for the gas-powered truck will be $3,500 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck and decide which to recommend.

4. After discovering a new gold vein in the Colorado Mountains, CTC Mining Corp must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend $900,500 for new mining equipment and pay $250,000 for its installation. The gold mined will net the firm an estimated $345,000 each year for the 5-year life of the vein. CTCs cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year.

a. What are the projects NPV and IRR?

b. Should this project be undertaken if environmental impacts were not a consideration?

c. How should environmental effects be considered, or any other, project?