Complete tabs 10.4, 10.6, 10.11, 10.12, 10.19, and 10.22 in the attached Chapter 10 Excel spreadsheet. An EXAMPLE tab is provided in the spreadsheet for your guidance. You must use formulas in the spreadsheet to show your work.

10.1 Net present value: Riggs Corp. management is planning to spend $650,000 on a new marketing campaign. They believe that this action will result in additional cash flows of $325,000 over the next three years. If the discount rate is 17.5 percent, what is the NPV on this project? Year 0 1 2 3 Cash flows $ (650,000) $ 325,000 $ 325,000 $ 325,000 Cost of Capital NPV 17.50% $62,337.34 Year 0 1 2 3 17.50% Cash Flows PVIF NPV $ (650,000) 1.0000 $ (650,000.00) $ 325,000 0.8511 $ 276,595.74 $ 325,000 0.7243 $ 235,400.63 $ 325,000 0.6164 $ 200,340.96 $62,337.34 10.2. Net present value: Kingston, Inc. management is considering purchasing a new machine at a cost of $4,133,250. They expect this equipment to produce cash flows of $814,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? purchasing a new o produce cash 0, and $1,225,000 rcent, what is the 10.3. Net present value: Crescent Industries management is planning to replace some machinery in its plant. The cost of the new equipment and the resulting cash flows the accompanying table. If the firm uses an 18 percent discount rate for projects l management go ahead with the project? nning to replace some existing he resulting cash flows are shown in ount rate for projects like this, should 10.4. Net present value: Franklin Mints, a confectioner, is looking to purchase a new jellybean-making machine at a cost of $312,500. The company management projects that the cash flows from this investment will be $121,450 for the next seven years. If th appropriate discount rate is 14 percent, what is the NPV for the project? to purchase a new ny management projects the next seven years. If the he project? 10.5 Net present Value: Blanda Incorporated mangement is considering investing in two alt systems. The systems are mutually exclusive, and the cost of the new equipment and t flows are shown in the accompanying table. If the firm uses a 9 percent discount rate fo systems, in which system should the firm invest? dering investing in two alternative production the new equipment and the resulting cash 9 percent discount rate for their production 10.6 Payback: Refer to Problem 10.5. What are the payback periods for productio mutually exclusive, and the the firm always chooses projects with the lowest pa the firm invest? payback periods for production systems 1 and 2? If the systems are es projects with the lowest payback period, in which system should 10.7 Payback: Quebec, Inc., is purchasing machinery at a cost of $3,768,966. The company' management expects the machinery to produce cash flows of $979,225, $1,158,886, an $1,881,497 over the next three years, respectively. What is the payback period? f $3,768,966. The company's of $979,225, $1,158,886, and the payback period? 10.8 Payback: Northern Specialties just purchased inventory-management computer soft $1,645,276. Cost savings from the investment over the next six years will produc eth flow stream: $212,455, $292,333, $387,479, $516,345, $645,766, and $618,325. Wh period on this investment? anagement computer software at a cost of t six years will produc ethe following cash 45,766, and $618,325. What is the payback 10.9 Payback: Nakamichi Bancorp has made an investment in banking software at a cost Management expects productivity gains and cost savings over the next several years. expected to generate cash flows of $586,212, $713,277, $431,199, and $318,697 ove what is the investment's payback period? king software at a cost of $1,875,000. the next several years. If the firm is 199, and $318,697 over the next four years, 10.10 Average accounting return (ARR): Capitol Corp. management is expecting to gen of $63,435 over each of the next three years. The average book value of the compa that period will be $212,500. If the firm's acceptance decision on any project is base percent, should this project be accepted? agement is expecting to generate after-tax income ge book value of the company's equipment over cision on any project is based on an ARR of 37.5 10.11 Internal rate of return: Refer to problem 10.4. What is the IRR that Franklin Mints management can expect on this project? 10.4 Net present value: Franklin Mints, a confectioner, is looking to purchase a new jellybean-making machine at a cost of $312,500. The company management projects that the cash flows from this investment will be $121,450 for the next seven years. If th appropriate discount rate is 14 percent, what is the NPV for the project? RR that Franklin Mints to purchase a new ny management projects the next seven years. If the he project? 10.12 Internal rate of return: Hathaway, Inc., a resort management company, is refurbishi at a cost of $7.8 million. The firm expects that this will lead to additional cash flows the next six years. What is the IRR of this project? If the appropriate cost of capital should they go ahead with this project? ement company, is refurbishing one of its hotels lead to additional cash flows of $1.8 million for he appropriate cost of capital is 12 percent, 10.14 Net present value: Champlain Corp. is investigating two computer systems. The A $3,122,300 and will generate annual cost savings of $1,345,500 over the next five y system costs $3,750,000 and will produce cost savings of $1,125,000 in the first thr million for the next two years. If the company's discount rate for similar projects is 1 for the two systems? Which one should be chosen based on the NPV? ating two computer systems. The Alpha 8300 costs gs of $1,345,500 over the next five years. The Beta 2100 savings of $1,125,000 in the first three years and then $2 iscount rate for similar projects is 14 percent, what is the NPV en based on the NPV? 10.15 Net present value: Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. This calls for acquiring machinery that would cost $1,968,450. The machinery will have a life of five years and will produce the cash flows shown in the following table. What is the NPV if the discount rate is 15.9 percent? ng firm. Recently, it for acquiring ll have a life of five ing table. What is 10.16 a. b. c. Net present value: Cranjet Industries is expanding its product line and its production c flows of the two independent projects are given in the following table. The firm uses a projects. Are these projects independent or mutually exclusive? What are the NPVs of the two projects? Should both projects be accepted? Or either? Or neither? Explain your reasoning. line and its production capacity. The costs and expected cash table. The firm uses a discount rate of 16.4 percent for such ain your reasoning. 10.17 Net present value: Emporia Mills is evaluating two heating systems. Costs and savings are given in the followin table. The firm uses 11.5 percent to discount su flows. Which system should be chosen? eating systems. Costs and projected energy 11.5 percent to discount such project cash 10.18 Payback: Creative Solutions, Inc., has just invested $4,615,300 in new equipment. uses payback period criteria of not accepting any project that takes more than four recover costs. The company anticipates cash flows of $644,386, $812,178, $943,27 $1,364,997, $2,616,300, and $2,225,375 over the next six years. Does this investm the firm's payback criteria? ,615,300 in new equipment. The firm ct that takes more than four years to 644,386, $812,178, $943,279, six years. Does this investment meet 10.19 Discounted payback: Timeline Manufacturing Co. is evaluating two projects. criteria of three years or less. Project A has a cost of $912,855, and project B' flows from both projects are given in the following table. What are their discou which will be accepted with a discount rate of 8 percent? ring Co. is evaluating two projects. The company uses payback a cost of $912,855, and project B's cost is $1,175,000. Cash owing table. What are their discounted payback periods and of 8 percent? 10.20 Payback: Regent Corp. is evaluating three competing pieces of equipm projections for all three are given in the following table. Which would be on payback period? hree competing pieces of equipment. Costs and cash flow following table. Which would be the best choice based 10.21 Discounted payback: Nugent Communication Corp. is investing $9,365,0 benefits in the first three years after installation (as can be seen by the foll years. What is the discounted payback period for the project assuming a d . is investing $9,365,000 in new technologies. The company expects significant an be seen by the following cash flows), and a constant amount for four more project assuming a discount rate of 10 percent? 10.22 Modified internal rate of return (MIRR): Morningside Bakeries h purchased equipment at a cost of $650,000. The firm expects to g flows of $275,000 in each of the next four years. The company's co 14 percent. What is the MIRR for this project? orningside Bakeries has recently The firm expects to generate cash ars. The company's cost of capital is ? 10.23 Modified internal rate of return (MIRR): Sycamore Home Furnishings is lo machine that can create customized window treatments. The equipment wil generate cash flows of $85,000 over each of the next six years. If the compa percent, what is the MIRR on this project? e Home Furnishings is looking to acquire a new ments. The equipment will cost $263,400 and will ext six years. If the company's cost of capital is 12 10.24 Internal rate of return: Great Flights, Inc., an aviation firm, is considering pur million. The company would lease the aircraft to an airline. Cash flows from le following table. What is the IRR on this project? The firm's required rate of retu ation firm, is considering purchasingthree aircraft for a total cost of $161 n airline. Cash flows from leasing the proposed leases are shown in the he firm's required rate of return is 15 percent. 10.25 Internal rate of return: Refer to problem 10.5. Compute the IRR for both produc production system 2. Which hasa the higher IRR? Which production system h Explain why the IRR and NPV rankings of systems 1 and 2 are different. 10.5 Net present Value: Blanda Incorporated mangement is considering investing production systems. The systems are mutually exclusive, and the cost of the n the resulting cash flows are shown in the accompanying table. If the firm uses rate for their production systems, in which system should the firm invest? ute the IRR for both production system 1 and Which production system has the higher NPV? 1 and 2 are different. nt is considering investing in two alternative usive, and the cost of the new equipment and nying table. If the firm uses a 9 percent discount hould the firm invest? 10.26 Internal rate of return: Ancala Corporation is considering investments in two n Gold hats and belts. Due to a funding constraint, these line are mutually exclu estimated cash flows over its three year life, as well as the IRRs and NPVs of e the firm has decided to manufacture the belts, however, the CEO is questionin higher for manufacturing hats. Explain to the CEO why the IRRs and NPVs of the Cfo's decision correct? Year 0 1 2 3 NPV IRR Golf Belts ($1,000) $1,000 $500 $500 $698 54% Golf Hats ($500) $500 $300 $300 $428 61% investments in two new golf apparel lines for next season: ine are mutually excluisve. A summary of each project's he IRRs and NPVs of each, are outlined below. The CFO of he CEO is questioning the decision given that the IRR is he IRRs and NPVs of the belt and hat projects disagree? Is 10.27 Internal rate of return: Compute the IRR on the following cash flow streams: a. b. c. An initial investment of $25,000 followed by a single cash flow of $37,450 in ye An initial investment of $1 million followed by a single cash flow of $1,650,000 i An initial investment of $2 million followed by cash flows of $1,650,000 and $1, ng cash flow streams: h flow of $37,450 in year 6. sh flow of $1,650,000 in year 4. of $1,650,000 and $1,250,000 in years 2 and 4, respectively. 10.28 a. b. c. Internal rate of return: Compute the IRR for the following project cash flows. An initial outlay of $3,125,000 followed by annual cash flows of $565,325 for the An initial investment of $33,750 followed by annual cash flows of $9,430 for the An initial outlay of $10,000 followed by annual cash flows of $2,500 for the next e following project cash flows. al cash flows of $565,325 for the next eight years ual cash flows of $9,430 for the next five years ash flows of $2,500 for the next seven years 10.31 Year 0 1 2 3 4 5 6 7 Discount rate Draconian Measures, Inc., is evaluating two independent projects. The company percent discount rate for such projects. The cost and cash flows for the projects the following table. What are the NPVs of the two projects? $ $ $ $ $ $ $ Project 1 Project 2 ($8,425,375) $ (11,368,000) 3,225,997 $2,112,589 1,775,882 $3,787,552 1,375,112 $3,125,650 1,176,558 $4,115,899 1,212,645 $4,556,424 1,582,156 1,365,882 13.80% projects. The company uses a 13.8 h flows for the projects are shown in s? 10.32 a. b. c. 10.31 Year 0 1 2 3 4 5 6 7 Discount rate Refer to problem 10.31 What are the IRRs for both Projects? Does the IRR decision criterion differ from the earlier decisions? Explain how you would expect the mangement of Draconian Measures to decide Draconian Measures, Inc., is evaluating two independent projects. The company percent discount rate for such projects. The cost and cash flows for the projects following table. What are the NPVs of the two projects? $ $ $ $ $ $ $ Project 1 Project 2 ($8,425,375) $ (11,368,000) 3,225,997 $2,112,589 1,775,882 $3,787,552 1,375,112 $3,125,650 1,176,558 $4,115,899 1,212,645 $4,556,424 1,582,156 1,365,882 13.80% an Measures to decide? projects. The company uses a 13.8 h flows for the projects are shown in the 10.33 Net present value: Dravid, Inc., is currently evaluating three projects that are indepen 14.8 percent depending upon their financing plan. All three projects cost the same at $ accepted at a discount rate of 14.8 percent? What if the discount rateshown in the follo discount rate of 14.8 percent? What if the discount rate was 13.6 percent? Year 0 1 2 3 4 Discount rate (1) Discount rate (2) Project 1 Project 2 $ (500,000) $ (500,000) 0 0 $125,000 0 $150,000 $500,000 $375,000 $500,000 13.60% 14.80% hree projects that are independent. The cost of funds can be either 13.6 percent or ee projects cost the same at $500,000. Expected cash flow streams are would be discount rateshown in the following table. Which projects would be accepted at a was 13.6 percent? Project 3 $ (500,000) $245,125 $212,336 $112,500 $74,000 10.34 Intrepid, Inc., is considering investing in two or three independent projects. The costs and th cash flows are given in the following table. Theappropriate cost of capital is 14.5 percent. Compute the IRRs and identify the projects that should be accepted. Year 0 1 2 3 4 Project 1 Project 2 $ (275,000) $ (312,500) $ 63,000 $153,250 $ 85,000 $167,500 $ 85,000 $112,000 $ 100,000 Project 3 $ (500,000) $212,000 $212,000 $212,000 $212,000 t projects. The costs and the f capital is 14.5 percent. ed. 10.35 Jekyll & Hyde Corp. is evaluating two mutually exclusive projects. The cost of capital is 15 percent. Costs and cash flows are given in the following table. Which project should be accepted? Year PROJECT 1 PROJECT 2 0 $ (1,250,000) $ (1,250,000) 1 $ 250,000 $350,000 2 $ 350,000 $350,000 3 $ 450,000 $350,000 4 $ 500,000 $350,000 5 $ 750,000 $350,000 Cost of Capital = 15% ects. The cost of llowing table. 10.36 Larsen Automotive, a manufacturer of auto parts, is planning to invest in two projects. The company typically compares project returns to a cost of funds of 17 percent. Compute the IRRs based on the given cash flows in the following table. Which project(s) will be accepted? Year 0 1 2 3 4 Cost of Capital 17% Project 1 $ (475,000) $ 300,000 $ 110,000 $ 125,000 $ 140,000 Project 2 $ (500,000) $ 117,500 $ 181,300 $ 244,112 $ 278,955 planning to invest in two eturns to a cost of funds of cash flows in the following 10.37 Compute the IRR for each of the following projects. Year 0 1 2 3 4 5 Project 1 $ (10,000) $ 4,750 $ 3,300 $ 3,600 $ 2,100 Project 2 $ (10,000) $ 1,650 $ 3,890 $ 5,100 $ 2,750 $ 800 Project 3 $ (10,000) $ 800 $ 1,200 $ 2,875 $ 3,400 $ 6,600 10.38 a. b. c. Primus Corp. is planning to convert an existing warehouse into a new plant that w increase its production capacity by 45 percent. The cost of this project will be $7,125,000. It will result in additional cash flows of $1,875,000 for the next eight years. The company uses a discount rate of 12 percent. What is the payback period? What is the NPV for this project? What is the IRR? 0 $ (7,125,000) $ 1 1,875,000 $ 2 1,875,000 $ Annual Cash Flows 3 4 1,875,000 ### use into a new plant that will of this project will be 75,000 for the next eight Cash Flows $ 5 1,875,000 6 7 8 ### $ 1,875,000 $ 1,875,000 10.39 a. b. c. d. Quasar Tech Co. is investing $6 million in new machinery that will produce routers. Sales to its customers will amount to $1,750,000 for the next three $2.4 million for three more years. The project is expected to last six years a $898,620 (excluding depreciation). The machinery will be depreciated to ze straight-line method. The company's tax rate is 30 percent, and its cost of c What is the payback period? What is the average accounting return (ARR)? Calculate the project NPV. What is the IRR for the project? 0 Revenues Expenses Depreciation Tax rate Cost of Capital $ 6,000,000 Straight line 30% 16% 1 $ 1,750,000 $ 898,620 2 ### $ ### $ 3 1,750,000 898,620 nery that will produce the next-generation 000 for the next three years then increase to cted to last six years and cost the firm annually l be depreciated to zero by year 6 using the rcent, and its cost of capital is 16 percent. 4 $ 2,400,000 $ $ 898,620 $ 5 2,400,000 898,620 6 ### ### 10.40 Skywards, Inc., an airline caterer, is purchasing refrigerated trucks at a tax net income from this investment is expected to be $750,000 for the depreciation expense was $650,000. The company's cost of capital is 1 a. b. c. d. What is the discounted payback period? Compute the ARR. What is the NPV on this investment? Calculate the IRR. rchasing refrigerated trucks at a total cost of $3.25 million. Afterexpected to be $750,000 for the next five years. Annual he company's cost of capital is 17 percent. 10.41 Trident Corp. is evaluating two independent projects. The costs and expected cash flow table. The cost of capital is 10 percent. Year 0 $ 1 2 3 4 5 a. b. c. d. A (312,000) $ $121,450 $121,450 $121,450 $121,450 $121,450 B (395,000) $153,552 $158,711 $166,220 $132,000 $122,000 Calculate the project's NPV. Calculate the project's IRR. What is the decision based on NPV? What is the decision based on IRR? Is there a co If you are the decision maker for the firm which project or projects will be accepted? Ex ects. The costs and expected cash flows are given in the following decision based on IRR? Is there a conflict? roject or projects will be accepted? Explain your reasoning. 10.42 Tyler, Inc., is looking to considering switching to a new technology. The cost of the requ discount rate is 12 percent. The cash flows tht the firm expects to generate are as follo Year 1-2 3-5 6-9 CF 0 845000 1450000 a. Compute the payback and discounted payback periods for the project. b. What is the NPV for the project? Should the firm go ahead with the project? c. What is the IRR, and what would be the decision based on the IRR? ogy. The cost of the required equipment will be $4 million. The to generate are as follows: project. h the project? IRR? STP #10.1 Testco Corporation is considering adding a new product line. The cost of the fa equipment to produce this product is $1,780,000. Company management expe flows from the sale of this product to be $450,000 in each of the next eight year uses a discount rate of 12 percent for projects like this, what is the net present project? What is the internal rate of return? line. The cost of the factory and any management expects net cash ch of the next eight years. If Testco what is the net present value of this STP #10.2 Flowers Unlimited is considering purchasing an additional delivery truck wchich will ha will cost $42,000. Cost savings with this truck are expected to be $12,800 for the first years, and $5,000 for the last three years of the truck's useful life. What is the paybac discounted payback period for this project with a discount rate of 10 percent? livery truck wchich will have a seven-year useful life. The new truck o be $12,800 for the first two years, $8,900 for the following two l life. What is the payback period for this project? What is the e of 10 percent? STP #10.3 What is the average accounting rate of return (ARR) on a piece of equipment that will c will result in pretax cost savings of $380,000 for the first three years and then $280,000 years? Assume that the machinery will be depreciated to a salvage value of 0 over 6 ye line method and the company's average tax rate is 32 percent. If the acceptance decisi project exceeding and ARR of 20 percent, should this machinery be purchased? e of equipment that will cost $1.2 million and that ears and then $280,000 for the following three age value of 0 over 6 years using the straightIf the acceptance decision is based on the ry be purchased? STP #10.5 West Street Automotive is considering adding state safety inspections to their service offerings. The equipment necessary to perform these inspections will cost $557,000 a will generate cash flows of $195,000 over each of the next five years. If the cost of cap is 14 percent, what is the MIRR on this project? ections to their service ns will cost $557,000 and years. If the cost of capital 10.1 Net present value: Riggs Corp. management is planning to spend $650,000 on a new marketing campaign. They believe that this action will result in additional cash flows of $325,000 over the next three years. If the discount rate is 17.5 percent, what is the NPV on this project? Year 0 1 2 3 Cash flows $ (650,000) $ 325,000 $ 325,000 $ 325,000 Cost of Capital NPV 17.50% $62,337.34 Year 0 1 2 3 17.50% Cash Flows PVIF NPV $ (650,000) 1.0000 $ (650,000.00) $ 325,000 0.8511 $ 276,595.74 $ 325,000 0.7243 $ 235,400.63 $ 325,000 0.6164 $ 200,340.96 $62,337.34 10.2. Net present value: Kingston, Inc. management is considering purchasing a new machine at a cost of $4,133,250. They expect this equipment to produce cash flows of $814,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15 percent, what is the NPV of this investment? purchasing a new o produce cash 0, and $1,225,000 rcent, what is the 10.3. Net present value: Crescent Industries management is planning to replace some machinery in its plant. The cost of the new equipment and the resulting cash flows the accompanying table. If the firm uses an 18 percent discount rate for projects l management go ahead with the project? nning to replace some existing he resulting cash flows are shown in ount rate for projects like this, should 10.4. Net present value: Franklin Mints, a confectioner, is looking to purchase a new jellybe machine at a cost of $312,500. The company management projects that the cash flow investment will be $121,450 for the next seven years. If the appropriate discount rate is what is the NPV for the project? Discount rate Year Cash outflows: Cash Inflows Net Present Value 14% 0 -312500 1 2 3 121450 121450 121450 $208,314.62 to purchase a new jellybean-making projects that the cash flows from this appropriate discount rate is 14 percent, 4 5 6 7 121450 121450 121450 121450 10.5 Net present Value: Blanda Incorporated mangement is considering investing in two alt systems. The systems are mutually exclusive, and the cost of the new equipment and t flows are shown in the accompanying table. If the firm uses a 9 percent discount rate fo systems, in which system should the firm invest? dering investing in two alternative production the new equipment and the resulting cash 9 percent discount rate for their production 10.6 Payback: Refer to Problem 10.5. What are the payback periods for productio mutually exclusive, and the the firm always chooses projects with the lowest pa the firm invest? data is missing payback periods for production systems 1 and 2? If the systems are es projects with the lowest payback period, in which system should 10.7 Payback: Quebec, Inc., is purchasing machinery at a cost of $3,768,966. The company' management expects the machinery to produce cash flows of $979,225, $1,158,886, an $1,881,497 over the next three years, respectively. What is the payback period? f $3,768,966. The company's of $979,225, $1,158,886, and the payback period? 10.8 Payback: Northern Specialties just purchased inventory-management computer soft $1,645,276. Cost savings from the investment over the next six years will produc eth flow stream: $212,455, $292,333, $387,479, $516,345, $645,766, and $618,325. Wh period on this investment? anagement computer software at a cost of t six years will produc ethe following cash 45,766, and $618,325. What is the payback 10.9 Payback: Nakamichi Bancorp has made an investment in banking software at a cost Management expects productivity gains and cost savings over the next several years. expected to generate cash flows of $586,212, $713,277, $431,199, and $318,697 ove what is the investment's payback period? king software at a cost of $1,875,000. the next several years. If the firm is 199, and $318,697 over the next four years, 10.10 Average accounting return (ARR): Capitol Corp. management is expecting to gen of $63,435 over each of the next three years. The average book value of the compa that period will be $212,500. If the firm's acceptance decision on any project is base percent, should this project be accepted? agement is expecting to generate after-tax income ge book value of the company's equipment over cision on any project is based on an ARR of 37.5 10.11 Internal rate of return: Refer to problem 10.4. What is the IRR that Franklin Mints ma this project? 10.4 Net present value: Franklin Mints, a confectioner, is looking to purchase a new jellybe cost of $312,500. The company management projects that the cash flows from this inv for the next seven years. If the appropriate discount rate is 14 percent, what is the NPV Discount rate Year Cash outflows: Cash Inflows Cash flows Net Present Value IRR 14% $ $ 0 (312,500) 1 2 $ 121,450 $ 121,450 (312,500) $ 121,450 $ 121,450 $208,314.62 33.80% t is the IRR that Franklin Mints management can expect on looking to purchase a new jellybean-making machine at a ts that the cash flows from this investment will be $121,450 rate is 14 percent, what is the NPV for the project? 3 4 5 6 7 $ 121,450 $ 121,450 $ 121,450 $ 121,450 $ 121,450 $ 121,450 $ 121,450 $ 121,450 $ 121,450 $ 121,450 10.12 Internal rate of return: Hathaway, Inc., a resort management company, is refurbishi $7.8 million. The firm expects that this will lead to additional cash flows of $1.8 mill is the IRR of this project? If the appropriate cost of capital is 12 percent, should the Discount rate Year Cash outflows: Cash Inflows Cash flows Net Present Value IRR 12% 0 $ $ 1 2 (7.80) $ (7.80) $ ($0.40) 10.17% 1.80 1.80 $ ### 1.80 ement company, is refurbishing one of its hotels at a cost of itional cash flows of $1.8 million for the next six years. What pital is 12 percent, should they go ahead with this project? 3 $ $ 4 1.80 $ 1.80 $ 5 1.80 $ 1.80 $ (in Millions) 6 1.80 $ 1.80 $ 1.80 1.80 10.14 Net present value: Champlain Corp. is investigating two computer systems. The A $3,122,300 and will generate annual cost savings of $1,345,500 over the next five y system costs $3,750,000 and will produce cost savings of $1,125,000 in the first thr million for the next two years. If the company's discount rate for similar projects is 1 for the two systems? Which one should be chosen based on the NPV? ating two computer systems. The Alpha 8300 costs gs of $1,345,500 over the next five years. The Beta 2100 savings of $1,125,000 in the first three years and then $2 iscount rate for similar projects is 14 percent, what is the NPV en based on the NPV? 10.15 Net present value: Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. This calls for acquiring machinery that would cost $1,968,450. The machinery will have a life of five years and will produce the cash flows shown in the following table. What is the NPV if the discount rate is 15.9 percent? ng firm. Recently, it for acquiring ll have a life of five ing table. What is 10.16 a. b. c. Net present value: Cranjet Industries is expanding its product line and its production c flows of the two independent projects are given in the following table. The firm uses a projects. Are these projects independent or mutually exclusive? What are the NPVs of the two projects? Should both projects be accepted? Or either? Or neither? Explain your reasoning. line and its production capacity. The costs and expected cash table. The firm uses a discount rate of 16.4 percent for such ain your reasoning. 10.17 Net present value: Emporia Mills is evaluating two heating systems. Costs and savings are given in the followin table. The firm uses 11.5 percent to discount su flows. Which system should be chosen? eating systems. Costs and projected energy 11.5 percent to discount such project cash 10.18 Payback: Creative Solutions, Inc., has just invested $4,615,300 in new equipment. uses payback period criteria of not accepting any project that takes more than four recover costs. The company anticipates cash flows of $644,386, $812,178, $943,27 $1,364,997, $2,616,300, and $2,225,375 over the next six years. Does this investm the firm's payback criteria? ,615,300 in new equipment. The firm ct that takes more than four years to 644,386, $812,178, $943,279, six years. Does this investment meet 10.19 Discounted payback: Timeline Manufacturing Co. is evaluating two projects. criteria of three years or less. Project A has a cost of $912,855, and project B' flows from both projects are given in the following table. What are their discou which will be accepted with a discount rate of 8 percent? data is missing ring Co. is evaluating two projects. The company uses payback a cost of $912,855, and project B's cost is $1,175,000. Cash owing table. What are their discounted payback periods and of 8 percent? 10.20 Payback: Regent Corp. is evaluating three competing pieces of equipm projections for all three are given in the following table. Which would be on payback period? hree competing pieces of equipment. Costs and cash flow following table. Which would be the best choice based 10.21 Discounted payback: Nugent Communication Corp. is investing $9,365,0 benefits in the first three years after installation (as can be seen by the foll years. What is the discounted payback period for the project assuming a d . is investing $9,365,000 in new technologies. The company expects significant an be seen by the following cash flows), and a constant amount for four more project assuming a discount rate of 10 percent? 10.22 Modified internal rate of return (MIRR): Morningside Bakeries h equipment at a cost of $650,000. The firm expects to generate cas of the next four years. The company's cost of capital is 14 percent. project? Discount rate Year Cash outflows: Cash Inflows Cash flows IRR MIRR 14% $ $ 0 (650,000) 1 $ (650,000) $ 25% 24.95% 275,000 275,000 R): Morningside Bakeries has recently purchased irm expects to generate cash flows of $275,000 in each cost of capital is 14 percent. What is the MIRR for this 2 $ $ 275,000 275,000 3 $ ### $ 275,000 $ 4 275,000 275,000 10.23 Modified internal rate of return (MIRR): Sycamore Home Furnishings is lo machine that can create customized window treatments. The equipment wil generate cash flows of $85,000 over each of the next six years. If the compa percent, what is the MIRR on this project? e Home Furnishings is looking to acquire a new ments. The equipment will cost $263,400 and will ext six years. If the company's cost of capital is 12 10.24 Internal rate of return: Great Flights, Inc., an aviation firm, is considering pur million. The company would lease the aircraft to an airline. Cash flows from le following table. What is the IRR on this project? The firm's required rate of retu ation firm, is considering purchasingthree aircraft for a total cost of $161 n airline. Cash flows from leasing the proposed leases are shown in the he firm's required rate of return is 15 percent. 10.25 Internal rate of return: Refer to problem 10.5. Compute the IRR for both produc production system 2. Which hasa the higher IRR? Which production system h Explain why the IRR and NPV rankings of systems 1 and 2 are different. 10.5 Net present Value: Blanda Incorporated mangement is considering investing production systems. The systems are mutually exclusive, and the cost of the n the resulting cash flows are shown in the accompanying table. If the firm uses rate for their production systems, in which system should the firm invest? ute the IRR for both production system 1 and Which production system has the higher NPV? 1 and 2 are different. nt is considering investing in two alternative usive, and the cost of the new equipment and nying table. If the firm uses a 9 percent discount hould the firm invest? 10.26 Internal rate of return: Ancala Corporation is considering investments in two n Gold hats and belts. Due to a funding constraint, these line are mutually exclu estimated cash flows over its three year life, as well as the IRRs and NPVs of e the firm has decided to manufacture the belts, however, the CEO is questionin higher for manufacturing hats. Explain to the CEO why the IRRs and NPVs of the Cfo's decision correct? Year 0 1 2 3 NPV IRR Golf Belts ($1,000) $1,000 $500 $500 $698 54% Golf Hats ($500) $500 $300 $300 $428 61% investments in two new golf apparel lines for next season: ine are mutually excluisve. A summary of each project's he IRRs and NPVs of each, are outlined below. The CFO of he CEO is questioning the decision given that the IRR is he IRRs and NPVs of the belt and hat projects disagree? Is 10.27 Internal rate of return: Compute the IRR on the following cash flow streams: a. b. c. An initial investment of $25,000 followed by a single cash flow of $37,450 in ye An initial investment of $1 million followed by a single cash flow of $1,650,000 i An initial investment of $2 million followed by cash flows of $1,650,000 and $1, ng cash flow streams: h flow of $37,450 in year 6. sh flow of $1,650,000 in year 4. of $1,650,000 and $1,250,000 in years 2 and 4, respectively. 10.28 a. b. c. Internal rate of return: Compute the IRR for the following project cash flows. An initial outlay of $3,125,000 followed by annual cash flows of $565,325 for the An initial investment of $33,750 followed by annual cash flows of $9,430 for the An initial outlay of $10,000 followed by annual cash flows of $2,500 for the next e following project cash flows. al cash flows of $565,325 for the next eight years ual cash flows of $9,430 for the next five years ash flows of $2,500 for the next seven years 10.31 Year 0 1 2 3 4 5 6 7 Discount rate Draconian Measures, Inc., is evaluating two independent projects. The company percent discount rate for such projects. The cost and cash flows for the projects the following table. What are the NPVs of the two projects? $ $ $ $ $ $ $ Project 1 Project 2 ($8,425,375) $ (11,368,000) 3,225,997 $2,112,589 1,775,882 $3,787,552 1,375,112 $3,125,650 1,176,558 $4,115,899 1,212,645 $4,556,424 1,582,156 1,365,882 13.80% projects. The company uses a 13.8 h flows for the projects are shown in s? 10.32 a. b. c. 10.31 Year 0 1 2 3 4 5 6 7 Discount rate Refer to problem 10.31 What are the IRRs for both Projects? Does the IRR decision criterion differ from the earlier decisions? Explain how you would expect the mangement of Draconian Measures to decide Draconian Measures, Inc., is evaluating two independent projects. The company percent discount rate for such projects. The cost and cash flows for the projects following table. What are the NPVs of the two projects? $ $ $ $ $ $ $ Project 1 Project 2 ($8,425,375) $ (11,368,000) 3,225,997 $2,112,589 1,775,882 $3,787,552 1,375,112 $3,125,650 1,176,558 $4,115,899 1,212,645 $4,556,424 1,582,156 1,365,882 13.80% an Measures to decide? projects. The company uses a 13.8 h flows for the projects are shown in the 10.33 Net present value: Dravid, Inc., is currently evaluating three projects that are indepen 14.8 percent depending upon their financing plan. All three projects cost the same at $ accepted at a discount rate of 14.8 percent? What if the discount rateshown in the follo discount rate of 14.8 percent? What if the discount rate was 13.6 percent? Year 0 1 2 3 4 Discount rate (1) Discount rate (2) Project 1 Project 2 $ (500,000) $ (500,000) 0 0 $125,000 0 $150,000 $500,000 $375,000 $500,000 13.60% 14.80% hree projects that are independent. The cost of funds can be either 13.6 percent or ee projects cost the same at $500,000. Expected cash flow streams are would be discount rateshown in the following table. Which projects would be accepted at a was 13.6 percent? Project 3 $ (500,000) $245,125 $212,336 $112,500 $74,000 10.34 Intrepid, Inc., is considering investing in two or three independent projects. The costs and th cash flows are given in the following table. Theappropriate cost of capital is 14.5 percent. Compute the IRRs and identify the projects that should be accepted. Year 0 1 2 3 4 Project 1 Project 2 $ (275,000) $ (312,500) $ 63,000 $153,250 $ 85,000 $167,500 $ 85,000 $112,000 $ 100,000 Project 3 $ (500,000) $212,000 $212,000 $212,000 $212,000 t projects. The costs and the f capital is 14.5 percent. ed. 10.35 Jekyll & Hyde Corp. is evaluating two mutually exclusive projects. The cost of capital is 15 percent. Costs and cash flows are given in the following table. Which project should be accepted? Year PROJECT 1 PROJECT 2 0 $ (1,250,000) $ (1,250,000) 1 $ 250,000 $350,000 2 $ 350,000 $350,000 3 $ 450,000 $350,000 4 $ 500,000 $350,000 5 $ 750,000 $350,000 Cost of Capital = 15% ects. The cost of llowing table. 10.36 Larsen Automotive, a manufacturer of auto parts, is planning to invest in two projects. The company typically compares project returns to a cost of funds of 17 percent. Compute the IRRs based on the given cash flows in the following table. Which project(s) will be accepted? Year 0 1 2 3 4 Cost of Capital 17% Project 1 $ (475,000) $ 300,000 $ 110,000 $ 125,000 $ 140,000 Project 2 $ (500,000) $ 117,500 $ 181,300 $ 244,112 $ 278,955 planning to invest in two eturns to a cost of funds of cash flows in the following 10.37 Compute the IRR for each of the following projects. Year 0 1 2 3 4 5 Project 1 $ (10,000) $ 4,750 $ 3,300 $ 3,600 $ 2,100 Project 2 $ (10,000) $ 1,650 $ 3,890 $ 5,100 $ 2,750 $ 800 Project 3 $ (10,000) $ 800 $ 1,200 $ 2,875 $ 3,400 $ 6,600 10.38 a. b. c. Primus Corp. is planning to convert an existing warehouse into a new plant that w increase its production capacity by 45 percent. The cost of this project will be $7,125,000. It will result in additional cash flows of $1,875,000 for the next eight years. The company uses a discount rate of 12 percent. What is the payback period? What is the NPV for this project? What is the IRR? 0 $ (7,125,000) $ 1 1,875,000 $ 2 1,875,000 $ Annual Cash Flows 3 4 1,875,000 ### use into a new plant that will of this project will be 75,000 for the next eight Cash Flows $ 5 1,875,000 6 7 8 ### $ 1,875,000 $ 1,875,000 10.39 a. b. c. d. Quasar Tech Co. is investing $6 million in new machinery that will produce routers. Sales to its customers will amount to $1,750,000 for the next three $2.4 million for three more years. The project is expected to last six years a $898,620 (excluding depreciation). The machinery will be depreciated to ze straight-line method. The company's tax rate is 30 percent, and its cost of c What is the payback period? What is the average accounting return (ARR)? Calculate the project NPV. What is the IRR for the project? 0 Revenues Expenses Depreciation Tax rate Cost of Capital $ 6,000,000 Straight line 30% 16% 1 $ 1,750,000 $ 898,620 2 ### $ ### $ 3 1,750,000 898,620 nery that will produce the next-generation 000 for the next three years then increase to cted to last six years and cost the firm annually l be depreciated to zero by year 6 using the rcent, and its cost of capital is 16 percent. 4 $ 2,400,000 $ $ 898,620 $ 5 2,400,000 898,620 6 ### ### 10.40 Skywards, Inc., an airline caterer, is purchasing refrigerated trucks at a tax net income from this investment is expected to be $750,000 for the depreciation expense was $650,000. The company's cost of capital is 1 a. b. c. d. What is the discounted payback period? Compute the ARR. What is the NPV on this investment? Calculate the IRR. rchasing refrigerated trucks at a total cost of $3.25 million. Afterexpected to be $750,000 for the next five years. Annual he company's cost of capital is 17 percent. 10.41 Trident Corp. is evaluating two independent projects. The costs and expected cash flow table. The cost of capital is 10 percent. Year 0 $ 1 2 3 4 5 a. b. c. d. A (312,000) $ $121,450 $121,450 $121,450 $121,450 $121,450 B (395,000) $153,552 $158,711 $166,220 $132,000 $122,000 Calculate the project's NPV. Calculate the project's IRR. What is the decision based on NPV? What is the decision based on IRR? Is there a co If you are the decision maker for the firm which project or projects will be accepted? Ex ects. The costs and expected cash flows are given in the following decision based on IRR? Is there a conflict? roject or projects will be accepted? Explain your reasoning. 10.42 Tyler, Inc., is looking to considering switching to a new technology. The cost of the requ discount rate is 12 percent. The cash flows tht the firm expects to generate are as follo Year 1-2 3-5 6-9 CF 0 845000 1450000 a. Compute the payback and discounted payback periods for the project. b. What is the NPV for the project? Should the firm go ahead with the project? c. What is the IRR, and what would be the decision based on the IRR? ogy. The cost of the required equipment will be $4 million. The to generate are as follows: project. h the project? IRR? STP #10.1 Testco Corporation is considering adding a new product line. The cost of the fa equipment to produce this product is $1,780,000. Company management expe flows from the sale of this product to be $450,000 in each of the next eight year uses a discount rate of 12 percent for projects like this, what is the net present project? What is the internal rate of return? line. The cost of the factory and any management expects net cash ch of the next eight years. If Testco what is the net present value of this STP #10.2 Flowers Unlimited is considering purchasing an additional delivery truck wchich will ha will cost $42,000. Cost savings with this truck are expected to be $12,800 for the first years, and $5,000 for the last three years of the truck's useful life. What is the paybac discounted payback period for this project with a discount rate of 10 percent? livery truck wchich will have a seven-year useful life. The new truck o be $12,800 for the first two years, $8,900 for the following two l life. What is the payback period for this project? What is the e of 10 percent? STP #10.3 What is the average accounting rate of return (ARR) on a piece of equipment that will c will result in pretax cost savings of $380,000 for the first three years and then $280,000 years? Assume that the machinery will be depreciated to a salvage value of 0 over 6 ye line method and the company's average tax rate is 32 percent. If the acceptance decisi project exceeding and ARR of 20 percent, should this machinery be purchased? e of equipment that will cost $1.2 million and that ears and then $280,000 for the following three age value of 0 over 6 years using the straightIf the acceptance decision is based on the ry be purchased? STP #10.5 West Street Automotive is considering adding state safety inspections to their service offerings. The equipment necessary to perform these inspections will cost $557,000 a will generate cash flows of $195,000 over each of the next five years. If the cost of cap is 14 percent, what is the MIRR on this project? ections to their service ns will cost $557,000 and years. If the cost of capital Year 0 1 2 3 4 5 Cashflows $ (1,968,450) $ 512,496 $ (242,637) $ 814,558 $ 887,225 $ 712,642 k 15.90% Year Project A Project B 0 -912,855 -1,175,000 1 86,212 586,212 2 313,562 413,277 3 427,594 231,199 4 285,552 Year 0 1 2 3 4 5 Cashflows $ (1,968,450) $ 512,496 $ (242,637) $ 814,558 $ 887,225 $ 712,642 k 15.90% Year Project A Project B 0 -912,855 -1,175,000 1 86,212 586,212 2 313,562 413,277 3 427,594 231,199 4 285,552