1. The net present value and internal rate of return desirability measures for two mutually exclusive investments being considered by Stockton Corporation to follow.

Year NPV IRR

R 161 14.60%

S 138 15.55%

Which investment should be chosen? ________________

2. SCA Corporation is considering investments G and H. Initial costs and year-end cash flows follow. The limiting resource that caused the two investments to be mutually exclusive can be reused. The required return is 6.5 percent.

Year 0 1 2 3 4 5

G -150,000 45,000 54,000 54,000 80,000

H -95,000 35,000 25,000 66,000 45,000 60,000

Net present value for project G_____________ Equivalent annuity for project G_________

Net present value for project H_____________ Equivalent annuity for project H_________

Which investment should be chosen? _______________

3. We have three options in replacing our fleet of vehicles. Option one is to use high-end vehicles that cost $85,000 dollars, require maintenance of $1,000 per year and have a salvage value of $60,000 after five years. Option two is to use mid-value vehicles that cost $65,000, require $2,000 in maintenance each year, and have a salvage value of $50,000 after four years. Option three is to use low-value vehicles that cost $40,000, require maintenance of $3,000 per year, and can be sold for $25,000 after three years of usage. Using a 6% cost of money please calculate the equivalent annual cost/charge for each option and recommend the best financial option. Assume year-end cash flows for simplicity.

Equivalent annual charge for the high-end option_________

Equivalent annual charge for the mid-value option_________

Equivalent annual charge for the low-value option_________

Which option should be chosen? _______________

4. We can remodel our existing building at a cost of $6.9 million, or build a new building at a cost of $11 million. The old building, after it is refurbished, would not be as efficient as the new one, and energy costs would therefore be $750,000 a year higher. The maintenance cost for the old building would be $450,000 per year and $420,000 for the new building. The salvage value for the new building would be $3.25 million after its 15-year life, while the salvage value for the old building would be $1,800,000 after its 9-year life. In addition, the new building would allow our company to project a “Green Friendly” image that would result in better recruitment of clients and personnel. It is estimated that this “Green Friendly” image would result in cost savings or increased cash flows (after-tax) of $320,000 per year. If the new building is built, the old, the old building can be sold now for $850,000 in its present condition (please read pages 208-209 for the treatment of this cash flow). The required return for Boulder is 9 percent.

Net present value for keeping the old building_____________ Equivalent annuity for keeping the old building_________

Net present value for building a new building____________ Equivalent annuity for building a new building_________

Which option should be chosen? _______________

5. An asset costs $165,000 and will generate cash benefits of $42,000 at the end of each year for six years. Salvage values are $78,000, $58,000, $48,000, $38,000 and $18,000 at the end of years 2, 3, 4, 5 and 6 respectively. The required return is 5.5 percent. Assuming that this asset can be replicated.

Equivalent annuity if abandoned after 6 years ______________

Equivalent annuity if abandoned after 5 years ______________

Equivalent annuity if abandoned after 4 years ______________

Equivalent annuity if abandoned after 3 years ______________

Equivalent annuity if abandoned after 2 years ______________

When is the optimal time to abandon the investment?

Problems 6 to 12

A proposed project requiring an initial outlay of $230,000 will provide the following year-end cash flows (remember that the initial outlay and year 3 are negative cash flows)

Year 1 2 3 4 5 6

Cash Flows $140,000 $171,000 $-440,000 $259,000 $321,000 $265,000

6. Using a 6.6% required return, please compute the net present value______________. Is the investment desirable?

7. Using a 6.6% required return, please compute the profitability index for the above investment__________________.

8. Using a 6.6% required return, please compute the modified profitability index for the above investment__________________.

9. Compute the internal rate of return for the above investment __________________.

10. Using a 6.6% required return, compute the modified internal rate of return for the above investment _________________

11. Please compute the payback period for the above investment__________________.

12. Using a 6.6% required return, please compute the present value payback period for the above investment__________________.