1. Your company is considering a machine that will cost $1,000 at Time 0 and which can be sold after three years for $100. To operate the machine, $200 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 3. The machine will produce sales revenues of $900/year for three years; variable operating costs (excluding depreciation) will be 50 per cent of sales. Operating cash inflows will begin year from today (at Time 1). The machine will have depreciation expenses of $500, $300, and $200 in Years 1, 2, and 3, respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative, and a 10 per cent required rate of return. Inflation is zero. What is the project's NPV? 2. Real Time Systems Inc. is considering the development of one of two mutually exclusive new computer models. Each will require a net investment of $5,000. The cash flow figures for each project are shown below: Period Project A Project B 1 $2,000 $3,000 2 2,500 2,600 3 2,250 2,900 R=12% Rb=12+2%-14% Model B, which will use a new type of laser disk drive, is considered a high-risk project, while Model A is of average risk. Real Time adds 2 percentage points to arrive at a risk- adjusted discount rate when evaluating a high-risk project. The rate used for average risk projects is 12 per cent. What model you will choose to develop? 3. Tas Pulp Company (TPC) can control its environmental pollution using either Project Old Tech' or 'Project New Tech. Both will do the job, but the actual costs involved with Project New Tech, which uses unproved, new state-of-the-art technology, could be much higher than the expected cost levels. The cash outflows associated with Project Old Tech, which uses standard proven technology, are less risky--they are about as uncertain as the cash flows associated with an average project. TPC's required rate of return for average risk projects is normally set at 12 per cent, and the company adds 3 per cent for high risk projects but subtracts 3 per cent for low risk projects. The two projects in question meet the criteria for high and average risk, but the financial manager is concerned about applying the normal rule to such cost-only projects. You must decide which project to recommend, and you should recommend the one with the lower PV of costs. What is the PV of costs of the better project? Cash Outflows Years 0 1 2 3 4 Project New Tech 1,500 315 315 315 315 Project Old Tech 600 600 600 600 600