(IRR

calculation)

1. Determine the IRR on the followingprojects:

a. An initial outlay of

$12,000

resulting in a free cash flow of

$1,847

at the end of each year for the next

9

years

b. An initial outlay of

$12,000

resulting in a free cash flow of

$2,093

at the end of each year for the next

19

years

c. An initial outlay of

$12,000

resulting in a free cash flow of

$1,192

at the end of each year for the next

15

years

d. An initial outlay of

$12,000

resulting in a free cash flow of

$2,879

at the end of each year for the next

5

years

2. (NPV,

PI, and IRR

calculations)

Fijisawa Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be

$2,000,000,

and the project would generate incremental free cash flows of

$650,000

per year for

6

years. The appropriate required rate of return is

8

percent.

a. Calculate the

NPV.

b. Calculate the

PI.

c. Calculate the

IRR.

d. Should this project beaccepted?

3. Payback

period, NPV,PI, and IRR

calculations)

You are considering a project with an initial cash outlay of

$70,000

and expected free cash flows of

$26,000

at the end of each year for

6

years. The required rate of return for this project is

9

percent.

a. What is theproject's paybackperiod?

b. What is theproject's

NPV?

c. What is theproject's

PI?

d. What is theproject's

IRR?

4. Calculate the NPV given the following cashflows,

,

if the appropriate required rate of return is

11

percent. Should the project beaccepted?

YEARCASH FLOWS

0-60,000

125,000

225,000

320,000

420,000

510,000

610,000

5. Microwave OvenProgramming, Inc. is considering the construction of a new plant. The plant will have an initial cash outlay of

$9

million, and will produce cash flows of

$3

million at the end of year1,

$4

million at the end of year2, and

$2

million at the end of years 3 through 5. What is the internal rate of return on this newplant?

6. Nanotech, Inc. currently has an electronics productionfacility, and it is cost prohibitive to expand this production facility. Nanotech is deciding among the following fourcontracts:

CONTRACT'S NPVUSE OF PRODUCTION FACILITY

A$120100%

B$11090%

C$6060%

D$5040%

.

Which project or projects should Nanotechaccept?

A.

B and C

B.

A

C.

BandD

D.

CandD

E.

B

7. Racin' Scooters is introducing a new product and has an expected change in EBIT of

$455,000.

Racin' Scooters has a

36

percent marginal tax rate. The project will produce

$130,000

of depreciation per year. Inaddition, the project will cause the following changes in year1:

WITHOUT THE PROJECTWITH THE PROJECT

Accounts receivable48,00061,000

Inventory63,00089,000

Accounts payable76,00094,000

What is theproject's free cash flow in year1?

8. (New

project

analysis)

Garcia's Truckin' Inc. is considering the purchase of a new production machine for

$250,000.

The purchase of this machine will result in an increase in earnings before interest and taxes of

$60,000

per year. To operate the machineproperly, workers would have to go through a brief training session that would cost

$4,000

after taxes. It would cost

$8,000

to install the machine properly.Also, because this machine is extremelyefficient, its purchase would necessitate an increase in inventory of

$10,000.

This machine has an expected life of

10

years, after which it will have no salvage value.Finally, to purchase the newmachine, it appears that the firm would have to borrow$100,000 at

12

percent interest from its localbank, resulting in additional interest payments of

$12,000

per year. Assume simplifiedstraight-line depreciation and that the machine is being depreciated down tozero, a

34

percent marginal taxrate, and a required rate of return of

12

percent.

a. What is the initial outlay associated with thisproject?

b. What are the annualafter-tax cash flows associated with this project for years 1 through9?

c. What is the terminal cash flow in year

10

(what is the annualafter-tax cash flow in year

10

plus any additional cash flows associated with the termination of theproject)?

d. Should the machine bepurchased?

(Round to the nearestdollar.)