1. Given the cash flows of the four projects, A, B, C, and D, and using the payback period decision model, which projects do you accept and which projects do you reject with a three-year cutoff period for recapturing the initial cash outflow? Assume that the cash flows are equally distributed over the year. Cash Flow c $25,000 $100,000 Cost $10,000 $45,000 $ 2,000 $ 8,000 $ 40,000 $ 4,000 Cash flow year 1 $10,000 $ 4,000 Cash flow year 2 $15,000 30,000 $ 4,000 Cash flow year 3 $20,000 $14,000 $20,000 Cash flow year 4 4,000 $20,000 10,000 $20,000 $ 4,000 Cash flow year 5 $26,000 $15,000 $ 0 $ 4,000 $10,000 Cash flow year 6 $32,000 0 2. Assume the above table for future cash flow of projects. Calculate the discounted payback period for projects A and B if the discount rate is 10 % 3. Quark Industries has a project with the following projected cash flows: Initial Cost, Year 0: $240,000 Cash flow year one: $25,000 Cash flow year two: $75,000 Cash flow year three: $150,000 Cash flow year four: $150,000 a. Using a 10% discount rate for this project and the NPV model, determine whether the company should accept or reject this project? b. Should the company accept or reject it using a 15 % discount rate? c. Should the company accept or reject it using a 20% discount rate? 4. Lepton Industries has a project with the following projected cash flows: Initial Cost, Year 0: $468,000 Cash flow year one: $135,000 Cash flow year two: $240,000 Cash flow year three: $185,000 Cash flow year four: $135,000 Plot the NPV profile of this project in Excel. Start with discount rate equal to zero and increase the discount rate by 2% increments until discount rate equal to 30% For what discount rates would Lepton accept this project? For what discount rates would Lepton reject this project? What's your estimate about the IRR of this project? 5. Quark Industries has four potential projects, all with an initial cost of $2,000,000. The capital budget for the year will allow Quark Industries to accept only one of the four projects. Given the discount rates and the future cash flows of cach project, determine which project Quark should accept. Project M Project O Cash Flow Project N Project P $ 300,000 Year 1 $500,000 $600,000 $1,000,000 $ 500,000 Year 2 $500,000 $600,000 $800,000 $ 700,000 $ 900,000 $ 1,100,000 Year 3 $500,000 $600,000 $600,000 Year 4 $500,000 $600,000 $400,000 Year 5 $500,000 $600,000 $200,000 Discount rate 6 % 9% 15% 22% 6. Calculate the IRR of the projects above for Quark Industries. (Hint: you should use Excel for this problem.) 7. Calculate the MIRR of Project M for Quark Industries. Chandler and Joey were having a discussion about which financial model to use for their new business Chandler supports NPV and Joey supports IRR. The discussion starts to get heated when Ross steps in and states, "Gentlemen, it doesn't matter which method we choose, they give the same answer on all projects." Is Ross correct? Under what conditions will IRR and NPV be consistent when accepting or rejecting projects? 9. Calculate the profitability index of Project M for Quark Industries in problem 5. Should Quark Industries accept Project M
