Radiology Associates is considering an investment which will cost $259,000. The investment

produces no cash flows for the first year. In the second year

, the cash inflow is $58,000. This

inflow will increase to $150,000 and then $200,000 for the following two years before ceasing

permanently. The firm requires a 14 percent rate of return and has a required discounted payback

period of three years. Accept

or reject this project? Why?

2.

You are analyzing the following two mutually exclusive projects and have developed the

following information. What is the crossover rate?

3.

A proposed project lasts 3 years and has an initial investment of $500,000. The

after tax cash

flows are estimated at $120,000 for year 1, $240,000 for year 2, and $240,000 for year 3. The

firm has a target debt/equity ratio of 0.6. The firms cost of equity is 15% and its cost of debt is

8%. The tax rate is 35%. What is the NPV o

f this project? (hint: remember that the D/E is

saying that debt is 60% of equity. In other words, you need to find D/A and E/A for the

appropriate weights

using the formulas:

21

D/E/(1+ D/E) =% or weight of debt and 1/(1+D/E)= % or weight of equity.

4.

Puppy

Inc. has the following mutually exclusive investment opportunities. If the appropriate

discount rate was 15% what should you do?

Year

Project X

Project Y

0

-

500

-

800

1

100

500

2

475

3

50

3

50

350

A.

Calculates each projects payback period cutoff.

W

hich would you accept if Puppy

s

payback period cutoff is 2 year

s

?

B.

Calculate each projects discounted payback period cutoff. W

hich would you accept

if Puppys payback period cutoff is 2

year

s

?

C.

What is the NPV for each project?

5.

Consider the following

two mutually exclusive projects.

Time

Project A

Project B

0

-

$300

-

$405

1

-

$387

$134

2

-

$193

$134

3

-

$100

$134

4

$600

$134

5

$600

$134

6

$850

$134

7

-

$180

$0

What is each pr

ojects MIRR with a cost of capi

tal

of 12%? Which project should be selected?