P 10-6 How is a net present value profile used to compare projects? What causes conflicts in the ranking of projects via net present value and internal rate of return?

P1010 NPV and maximum return A firm can purchase new equipment for $150,000 that generates an annual cash inflow of $44,400 for four years.

Determine the net present value (NPV) of the equipment, assuming the firm has a 10% cost of capital. Is the project acceptable?

If the firms cost of capital is lower than 10%, does the investment in equipment become more or less desirable? What is the highest cost of capital (closest whole-percentage rate) that the firm can have and still find that purchasing the equipment is worthwhile? Discuss this finding in light of your response in part a.

P1012

Long-term investment decision, NPV method Jenny Jenks has researched the financial pros and cons of entering into a one-year MBA program at her state university. The tuition and books for the masters program will have an up-front cost of $50,000. If she enrolls in an MBA program, Jenny will quit her current job, which pays $50,000 per year (for simplicity, treat any lost earnings as part of the up-front cost). On average, a person with an MBA degree earns an extra $20,000 per year over a business career of 40 years. Jenny believes that her opportunity cost of capital is 6%. Given her estimates, find the net present value (NPV) of entering this MBA program. Are the benefits of further education worth the associated costs?

P1019

IRR: Mutually exclusive projects Nile Inc. wants to choose the better of two mutually exclusive projects that expand warehouse capacity. The projects cash flows appear below. The cost of capital is 15%.

Calculate the IRR to the nearest whole percent for each of the projects.

Assess the acceptability of each project on the basis of the IRRs found in part a.

Which project, on this basis, is preferred?

P1022

NPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $18,250, and the project will yield cash inflows of $4,000 per year for seven years. The firm has a 10% cost of capital.

Determine the net present value (NPV) for the project.

Determine the internal rate of return (IRR) for the project.

Would you recommend that the firm accept or reject the project? Explain.