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EXCEL FILE 1 Week 4 Homework Assignment: Chapter 8: 3, 4, 5, 6 3. Calculating Payback. Global Toys Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Year Cash Flow (A) Cash Flow (B) 0 $55,000 $ 95,000 1 19,000 18,000 2 27,000 26,000 3 24,000 28,000 4 9,000 260,000 4. Calculating AAR. You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $14 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,253,000, $1,935,000, $1,738,000, and $1,310,000 over these four years, what is the project's average accounting return (AAR)? 5. Calculating IRR. A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project? Year Cash Flow 0 $153,000 1 78,000 2 67,000 3 49,000 6. Calculating NPV. For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent? EXCEL FILE 2 9. Calculating NPV. For the cash flows in the previous problem, what is the NPV at a discount rate of zero percent? What if the discount rate is 10 percent? If it is 20 percent? If it is 30 percent? EXCEL FILE 3 10. NPV versus IRR. Romboski, LLC, has identified the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 $65,000 $65,000 1 34,000 19,000 2 27,000 25,000 3 21,000 29,000 4 17,000 34,000 a. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct? b. If the required return is 11 percent, what is the NPV for each of these projects? Which project will you choose if you apply the NPV decision rule? c. Over what range of discount rates would you choose Project A? Project B? At what discount rate would you be indifferent between these two projects? Explain. 11. NPV versus IRR. Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) 0 $19,000 $19,000 1 10,800 6,840 2 8,630 9,410 3 5,210 9,300 Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects? 15. Comparing Investment Criteria. Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 $365,000 $40,000 1 38,000 20,300 2 47,000 15,200 3 62,000 14,100 4 455,000 11,200 Whichever project you choose, if any, you require a return of 13 percent on your investment. a. If you apply the payback criterion, which investment will you choose? Why? b. If you apply the NPV criterion, which investment will you choose? Why? c. If you apply the IRR criterion, which investment will you choose? Why? d. If you apply the profitability index criterion, which investment will you choose? Why? e. Based on your answers in (a) through (d), which project will you finally choose? Why
