QUESTION 1:

A project requires an initial investment in equipment and machinery of $10 million. The equipment is expected to have a 5-year lifetime with no salvage value and will be depreciated on a straight-line basis. The project is expected to generate revenues of $5.1 million each year for the 5 years and have operating expenses (not including depreciation) amounting to 1/3 of revenues. The tax rate is 40%. What is the net cash ow in year 1? The cash ows associated with an investment project are as follows: Cash Flows Initial Outflow -$70,000 Year 1 $20,000 Year 2 $30,000 Year 3 $30,000 Year 4 $30,000 What's the payback period of the project? If a rm's cutoff payback period is 3 years, should it accept the project? Johnson Chemicals is considering an investment project. The project requires an initial $3 million outlay for equipment and machinery. Sales are projected to be $1.5 million per year for the next four years. The equipment will be fully depreciated straight-line by the end of year 4. Cost of goods sold and operating expense (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for $400,000 at the end of year 4. Johnson Chemicals also needs to add net working capital of $100,000 immediately. The net working capital will be recovered in full at the end of the fourth year. Assume the tax rate is 40% and the cost of capital is 10%. What is the N PV of this investment? Year O CF = -$20,000; Year 1 CF = $3,000; Year 2 CF = $4,000; Year 3 CF = $5,000; Year 4 CF = $6,000; Year 5 CF = $7,000. What is the profitability index of the proposed project if the discount rate is 6%?Nicholas Manufacturing just announced yesterday that its 4th quarter earnings will be 10% higher than last year's 4th quarter. You observe that Nicholas had an abnormal return of -1.2% yesterday. This suggests that O the market is not efcient. O investors expected the earnings increase to be smaller than what was actually announced. 0 earnings are expected to decrease next quarter. 0 Nicholas' stock will probably rise in value tomorrow. 0 investors expected the earnings increase to be larger than what was actually announced. The following table gives the available projects (in $millions) for a rm. A B C D E F G 90 20 60 50 150 40 20 Initial investment 140 70 65 -10 30 32 10 NPV If the rm has a limit of $210 million to invest, what is the maximum NPV the company can obtain