1. Calculating Payback [LO2] What is the payback period for the following set of cash flows? Year 0 1 Cash Flow -$5,500 1,300 1,500 1,900 1,400 2 3 4 2. Calculating Payback [LO2] An investment project provides cash inflows of $585 per year for eight years. What is the project payback period if the initial cost is $1,700? What if the initial cost is $3,300? What if it is $4,900? 3. Calculating Payback [LO2] Buy Coastal, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Year 0 1 Cash Flow (A) - $60,000 23,000 28,000 21,000 8,000 Cash Flow (B) -$ 70,000 15,000 18,000 26,000 230,000 2 3 4 4. Calculating Discounted Payback [LO3] An investment project has annual cash inflows of $3,200, $4,100, $5,300, and $4,500, and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial cost is $5,900? What if the initial cost is $8,000? What if it is $11,000? 5. Calculating Discounted Payback [LO3] An investment project costs $10,000 and has annual cash flows of $2,900 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5 percent? If it is 19 percent? 22 6. Calculating AAR (LO4] You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12 mil- lion, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,854,300, $1,907,600, $1,876,000, and $1,329,500 over these four years, what is the project's average accounting return (AAR)? 7. Calculating IRR [LO5] A firm evaluates all of its projects by applying the IRR rule. If the required return is 14 percent, should the firm accept the following project? X Year 0 1 2 3 Cash Flow - $28,000 12,000 15,000 11,000 I 8. Calculating NPV [LO1] For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return is 25 percent? X 9. Calculating NPV and IRR [LO1, 5] A project that provides annual cash flows of $17,300 for nine years costs $79,000 today. Is this a good project if the required return is 8 percent? What if it's 20 percent? At what discount rate would you be indifferent between accepting the project and rejecting it? 10. Calculating IRR [LO5] What is the IRR of the following set of cash flows? Year 1 2 3 Cash Flow -$16,400 7.100 8,400 6,900 11. Calculating NPV [LO1] For the cash flows in the previous problem, what is the NPV at a discount rate of zero percent? What if the discount rate is 10 percent? If it is 20 percent? If it is 30 percent? X 12. NPV versus IRR [LO1, 5] Garage, Inc., has identified the following two mutually exclusive projects: Year NO Cash Flow (A) -$29,000 14,400 12,300 9,200 5,100 Cash Flow (B) -$29,000 4,300 9,800 15,200 16,800 3 4 a. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct? b. If the required return is 11 percent, what is the NPV for each of these projects? Which project will the company choose if it applies the NPV decision rule? c. Over what range of discount rates would the company choose project A? Project B? At what discount rate would the company be indifferent between these two projects? Explain. Chapter 9 Nat. Present Value and onbedovestment Categia 17 301 tv EPIC TH 13. NPV versus IRR [LO1, 5] Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) 0 -$20,000 $20,000 1 8,850 10,100 9,100 7,800 3 8,800 8,700 2 Year 0 1 2 Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects? 14. Problems with IRR [LO5] Light Sweet Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Cash Flow - $39,000,000 63,000,000 -12,000,000 a. If the company requires a 12 percent return on its investments, should it accept this project? Why? b. Compute the IRR for this project. How many IRRs are there? Using the IRR decision rule, should the company accept the project? What's going on here? 15. Calculating Profitability Index [LO7] What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Year Cash Flow 0 -$18,000 1 10,300 2 9,200 3 5,700 Problems with Profitability Index [LO1, 7] The Angry Bird Corporation is trying to choose between the following two mutually exclusive design projects: 16. 17 25 tv EPIC 16. Problems with Profitability Index [LO1, 7] The Angry Bird Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (1) Cash Flow (II) 0 - $64,000 -$18,000 1 31,000 9,700 2. 31,000 9,700 3 31,000 9,700 a. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept? b. If the company applies the NPV decision rule, which project should it take? c. Explain why your answers in (a) and (b) are different. 17. Comparing Investment Criteria [L01, 2, 3, 5, 7] Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) - $350,000 -$50,000 1 45,000 24,000 2 65,000 22,000 3 65,000 19,500 4 440,000 14,600 ANO