PLEASE SHOW WORK

1. AAA Inc. is considering two projects with the following cash flows. Year Project X Project Y 0 ($100,000) ($100,000) 1 40,000 50,000 2 40.000 0 3 40,000 0 4 40,000 0 5 40,000 250,000 AAA uses the payback period method of capital budgeting and accepts only projects with payback periods of 3 years or less. a. If the projects are presented as standalone opportunities which one(s) would AAA accept? If they were mutually exclusive and AAA disregarded its three year rule, which project would be chosen? b. Is there a flaw in the thinking behind the correct answers to part a?

SOLUTION

2. A project has the following cash flows C0 C1 C2 C3 ($700) $200 $500 $244 a. What is the projects payback period? b. Calculate the projects NPV at 12%. c. Calculate the projects PI at 12%. SOLUTION:

3. Calculate the NPV for the following projects. a. An outflow of $7,000 followed by inflows of $3,000, $2,500 and $3,500 at one-year intervals at a cost of capital of 7% b. An initial outlay of $35,400 followed by inflows of $6,500 for three years and then a single inflow in the fourth year of $18,000 at a cost of capital of 9%. (Recognize the first three inflows as an annuity in your calculations.) c. An initial outlay of $27,500 followed by an inflow of $3,000 followed by five years of inflows of $5,500 at a cost of capital of 10%.

SOLUTION:

4. CCC Inc. is considering a project with the following cash flows. C0 C1 C2 C3 ($7,800) $2,300 $3,500 $4,153 a. CCC has a policy of rejecting all projects that dont pay back within three years outright, and analyzing those that do more carefully with time value based methods. Does this project warrant further consideration? b. Should CCC accept the project based on its NPV if the companys cost of capital is 8%? Is the recommendation definite or marginal? c. What conclusion will the firm reach Based on PI and an 8% cost of capital? Is the recommendation definite or marginal?

SOLUTION:

5. Project Alpha requires an initial outlay of $35,000 and results in a single cash inflow of $56,367.50 after five years. a. If the cost of capital is 8% what are Alpha's NPV and PI? Is the project acceptable under each of these techniques? b. What is project Alpha's IRR? Is it acceptable under IRR? c. What are Alpha's NPV and PI if the cost of capital is 12%? Is the project acceptable under that condition. d. What is Alpha's payback period? Does payback make much sense for a project like Alpha? Why?

SOLUTION:

6. The FFF Company is considering a project that requires an initial outlay of $75,000 and produces cash inflows of $20,806 each year for five years. FFF's cost of capital is 10%. a. Calculate the project's payback period by making a single division rather than accumulating cash inflows. Why is this possible in this case? b. Calculate the project's IRR recognizing the fact that the cash inflows are an annuity. Is the project acceptable? Did your calculation in this part result in any number(s) that were also calculated in part a? What is it about this problem that creates this similarity? Will this always happen in such cases? c. What is the project's NPV? Is it acceptable according to NPV rules?

SOLUTION:

7. Calculate the IRR, NPV, and PI for projects with the following cash flows. Do each NPV and PI calculation at costs of capital of 8% and 12%. Calculate IRRs to the nearest whole percent. a. An initial outlay of $5,000 and inflows of $1,050 for seven years. b. An initial outlay of $43,500 and inflows of 14,100 for four years c. An investment of $78,000 followed by 12 years of income of $11,500. d. An outlay of $36,423 followed by receipts $8,900 of for six years. SOLUTION:

8. III Airlines Inc. needs to replace a short haul computer plane on one of its busier routes. Two aircraft that satisfy the general requirements of the route are on the market. One is more expensive than the other but has better fuel efficiency and load-bearing characteristics that result in better long-term profitability. The useful life of both planes is expected to be about seven years, after which time both are assumed to have no value. Cash flow projections for the two aircraft follow: Low Cost High Cost Initial Cost $775,000 $950,000 Cash Inflows, years 1 through 7 $154,000 $176,275 a. Calculate the payback period for each plane and select the best choice. b. Calculate the IRR for each plane and select the best option. Use the fact that all the inflows can be represented by an annuity. c. Compare the results of parts a. and b. Both should select the same option, but does one method result in a clearer choice than the other based on the relative sizes of the two payback periods versus the relative sizes of the two IRRs? d. Calculate the NPV and PI of each project assuming a cost of capital of 6%. Use annuity methods. Which plane is selected by NPV? By PI? e. Calculate the NPV and PI of each project assuming the following costs of capital: 2%, 4%, 6%, 8% and 10%. Use annuity methods. Is the same plane selected by NPV and PI at every level of cost of capital? Investigate the relative attractiveness of the two planes under each method. f. Use the results of parts b. and e. to sketch the NPV profiles of the two proposed planes on the same set of axes. Show the IRRs on the graph. Would NPV and IRR ever give conflicting results? Why?

SOLUTION:

9. JJJ Bakery Inc. is considering two mutually exclusive projects with widely differing lives. The company's cost of capital is 12%. The project cash flows are summarized as follows: Project A Project B C0 ($25,000) ($23,000) C1 $14,742 $ 6,641 C2 $14,742 $ 6,641 C3 $14,742 $ 6,641 C4 $ 6,641 C5 $ 6,641 C6 $ 6,641 C7 $ 6,641 C8 $ 6,641 C9 $ 6,641 a. Compare the projects by using Payback. b. Compare the projects by using NPV. c. Compare the projects by using IRR. d. Compare the projects by using the replacement chain approach. e. Compare the projects by using the EAA method. f. Chose a project and justify your choice. SOLUTION: