Problem 1

Calculate the net present value of a project with a net investment of $20,000 for equipment and an additional net working capital investment of $5,000 at time 0. The project is expected to generate net cash flows of $7,000 per year over a 10-year estimated economic life. In addition, the net working capital will be recovered at the end of the project. The required return on the project is 11 percent and the company has a marginal tax rate of 40 percent.

What is the meaning of the computed net present value figure?

Problem 2

Calculate the internal rate of return and profitability index for a project that is expected to generate eight years of annual net cash flows of $75,000. The project has a net investment of $360,000 and the required return on the project is 12 percent.