1. Your brother wants to borrow $10,750 from you. He has offered to pay you back $12,500 in a year. If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

If the cost of capital of this investment opportunity is 10 % what is its NPV?

The NPV of the investment is (Round to the nearest cent.)

2. You are considering investing in a start up company. The founder asked you for $300,000 today and you expect to get $1,010,000 in 88 years. Given the riskiness of the investment opportunity, your cost of capital is 23% What is the NPV of the investment opportunity? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

What is the NPV of the investment opportunity?

The NPV of the investment is (Round to the nearest dollar.)

3. You are considering an investment in a clothes distributer. The company needs $109,000 today and expects to repay you $129,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 19 % What does the IRR rule say about whether you should invest?

What is the IRR of this investment opportunity?

The IRR of this investment opportunity is (Round to one decimal place.)

4. You own a coal mining company and are considering opening a new mine. The mine itself will cost $115 million to open. If this money is spent immediately, the mine will generate $19 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.7 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity?

(Hint: Consider the number of sign changes in the cash flows.) If the cost of capital is 8.2%, what does the NPV rule say? What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.)

A. Reject the opportunity because the IRR is lower than the 8.2% cost of capital.

B. There are two IRRs, so you cannot use the IRR as a criterion for accepting the opportunity.

C. Accept the opportunity because the IRR is greater than the cost of capital.

D. The IRR is 8.72%, so accept the opportunity.

5. You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $6,000 and will be posted for one year. You expect that it will generate additional revenue of $840 a month. What is the payback period?

The payback period is ______ months. (Round to two decimal places.)

6. You are considering making a movie. The movie is expected to cost $10.6 million upfront and take a year to make. After that, it is expected to make $ 4.1 million in the first year it is released (end of year 2) and $1.9 million for the following four years (end of years 3 through 6) . What is the payback period of this investment? If you require a payback period of two years, will you make the movie? What is the NPV of the movie if the cost of capital is 10.4%?

According to the NPV rule, should you make this movie?

What is the payback period of this investment?

The payback period is _______ years. (Round up to nearest integer.)

7. You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $9.5 million. Investment A will generate $ 1.98 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.45 million at the end of the first year, and its revenues will grow at 2.8% per year for every year after that.

a. Which investment has the higher IRR? (Round to the nearest integer.)

b. Which investment has the higher NPV when the cost of capital is 6.4%? (Round to the nearest integer.)

8. Consider two investment projects, which both require an upfront investment of $11 million, and both of which pay a constant positive amount each year for the next 12 years.Under what conditions can you rank these projects by comparing their IRRs?

(Select the best choice below.)

A. Ranking by IRR will work in this case so long as the projects' cash flows do not increase from year to year.

B. Ranking by IRR will work in this case so long as the projects have the same risk.

C. Ranking by IRR will work in this case so long as the projects' cash flows do not decrease from year to year.

D. There are no conditions under which you can use the IRR to rank projects.

9. AOL is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $ 15 million upfront investment and will generate $20 million in savings for AOL each year for the next 33 years. The second bid from Cisco requires a $81 million upfront investment and will generate $60 million in savings each year for the next 33 years.

a. What is the IRR for AOL associated with each bid? Round to one decimal place.)

b. If the cost of capital for each investment is 19 % what is the net present value (NPV) of each bid? Round to one decimal place.) Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, AOL will pay $ 26 million upfront, and $ 35 million per year for the next 33 years. AOL's savings will be the same as with Cisco's original bid.

c. What is the IRR of the Cisco bid now? Round to one decimal place.)

d. What is the new NPV? (Round to one decimal place.)

e. What should AOL do?

What is the IRR for AOL associated with each bid? (Round to one decimal place.)

10. Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $15 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 44 % will come from customers who switch to the new, healthier pizza instead of buying the original version.

a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? Round to two decimal places.)

b. Suppose that 38 % of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case? Round to two decimal places.)

a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? Round to two decimal places.)

The incremental sales are (Round to two decimal places.)

11. Cellular Access Inc., is a cellular telephone service provider that reported net operating profit after tax (NOPAT) of $ 244 million for the most recent fiscal year. The firm had depreciation expenses of $104 million, capital expenditures of $ 194 million, and no interest expenses. Working capital increased by $10 million.

Calculate the free cash flow for Cellular Access for the most recent fiscal year. The free cash flow is (Round to the nearest integer.)

12. A bicycle manufacturer currently produces 254,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $ 2.20 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $218,000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require additional working capital of $56,000 but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $16,350. If the company pays tax at a rate of 35 % and the opportunity cost of capital is 15 % what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

Project the annual free cash flows (FCF) of buying the chains. The annual free cash flows for years 1 to 10 of buying the chains is (Round to the nearest dollar. Enter a free cash outflow as a negative number.)