2. Your firm is considering two projects with the following cash flows:

See attachment

a. If the appropriate discount rate is1 2%, rank the two projects.

b. Which project is preferred if you rank by IRR?

c. Calculate the crossover rate?the discount rate r in which the NPVs of both projects are equal.

d. Should you use NPV or IRR to choose between the two projects? Give a brief discussion.

7. Acompanyisconsideringbuyinganewmachineforoneofitsfactories.Thecostofthemachine is $60,000 and its expected life span is 5 years. The machine will save the cost of a worker estimated at $22,500 annually. The book value of the machine at the end of year 5 is $10,000 but the company estimates that the market value will be only $5,000. Calculate the NPV of the machine if the discount rate is 12% and the tax rate is 30%. Assume straight-line depreciation over the 5-year life of the machine. (Hint: at the end of year 5, the salvage value is 5000 and the book value is 10000. So there is a tax credit of (10000-5000)*30% at the end of year 5.)

8. TheABDCompanyisconsideringbuyinganewmachineforoneofitsfactories.Themachinecost is $100,000 and its expected life span is 8 years. The machine is expected to reduce the production cost by $15,000 annually. The terminal value of the machine is $20,000 but the company believes that it would only manage to sell it for $10,000. If the appropriate discount rate is 15% and the corporate tax is 40%,

a. Calculate the project NPV.

b. Calculate the project IRR.

(Hint: Assume straight-line depreciation to the terminal value of $20000 in 8 years. Also note at the end of year 8, the machine is sold for $10000 whereas the book value is $20000. So there will be tax credit of 40%*(20000-10000).)

13. A company is considering whether to buy a regular or color photocopier for the office. The cost of the regular machine is $10,000, its life span is 5 years, and the company has to pay another $1,500 annually in maintenance costs. The color photocopier?s price is $30,000, its life span is also 5 years, and the annual maintenance costs are $4,500. The color photocopier is expected to increase the revenue of the office by $8,500 annually. Assume that the company is profitable and pays 40% corporate tax; the relevant interest rate is 11%. Which photocopy machine should the firm buy? (Hint: you might want to compare the differential cash flows between these two machines.)

14. TheCokacompanyisasoftdrinkcompany.Untiltodaythecompanyboughtemptycansfroman outside supplier that charges Coka $0.20 per can. In addition the transportation cost is $1,000 per truck that transports 10,000 cans. The Coka company is considering whether to start manufacturing cans in its plant. The cost of a can machine is $1 million and its life span is 12 years. The terminal value of the machine is $160,000. Maintenance and repair costs will be $150,000 for every 3-year period. The additional space for the new operation will cost the company $100,000 annually. The cost of producing a can in the factory is $0.17. The cost of capital of Coka is 11% and the corporate tax rate is 40%.

a. What is the minimum number of cans that the company has to sell annually to justify self- production of cans? (Hint: start by guessing that annual production is 3 million cans and then use Solver to correct the guess by making the NPV equal to 0. Note the NPV here should be the differential cash flows between own production and outside supply.)

b. Advanced: Use data table functionality to show the NPV and IRR of the project as a function of the number of cans.

15. The ZZZ Company is considering investing in a new machine for one of its factories. The company has two alternatives to choose from: The life span of each machine is 5 years. ZZZ sells each unit for a price of $6. The company has a cost of capital of 12% and its tax rate is 35%.

a. If the company manufactures 1 million units per year, which machine should it buy?

b. Plot a graph showing the profitability of investment in each machine type depending on the annual production. (Hint: you might want to use the Data Table functionality to examine how sensitive the NPV is to the annual production.)