exercise 4,7 & 8.

ker $700,000. This price includes all physical assets in the retail store and the inventaires You have some cash and the opportunity to buy a small retail store downtown You also have the option of buying $700,000 of mutual funds that pay 14% interest The annual cash flow from the retail store operations is expected to be $115.00 If you wanted to make the same return on your investment as you would with the 20 years you plan to retire, and you feel that the store will be sold then for $2 million EXERCISE 4: TIME-VALUE-OF-MONEY YARDSTICKS investment securities, would you buy the retail store? To answer this question, calculate the following: 1. Payback period 2. Net present value 3. Internal rate of return 4. Profitability index EXERCISE 7: CALCULATING THE NPV AND THE IRR Aaron Manufacturing Inc. intends to invest $70,000 in a modernization capital project that will generate the following cash inflows during eight years: Year $12,000 17,000 18,000 2 3 4 5 6 7 8 23,000DEX 15,000 11,000 9,000 8,000 Questions 1. Calculate the NPV at 12% and 18%. 2. Calculate the internal rate of return of the capital project. 3. If the annual cash flow were an even $15,000 per year for eight years, what would be the NPV at 12% and 18%? 4. What level of annual cash flow would be required to obtain a 20% IRR? 5. How would the results of (1) and (2) change if there was a capital recovery of $40,000 at the end of year 8? EXERCISE 8: DECIDING BETWEEN TWO OPTIONS Luster Electronics Company is analyzing two capital projects, project A and project B. Each has an initial capital cost of $12,000, and the weighted average cost of capital for both projects is 12%. The projected annual cash flows are as follows: Scanned with CamScanner 502 CHAPTER 11 Capital Budgeting Year 0 1 2 Project A ($12,000) 7,000 4,000 3,500 3,000 2,300 Project B ($12,000) 5,000 3,500 3,000 2,500 2,000 1,500 3 4 5 6 2,000 Questions 1. For each project, calculate the following: Payback period Net present value Internal rate of return Profitability index (using the 12% discount rate) 2. Which project or projects should be accepted if the two are independent? 3. Which project should be accepted if the two are mutually exclusive (that is, you can choose only one)