Question 1 5 pts

0 multiple_choice_question 22046808

The internal rate of return (IRR) is the interest rate that sets the net present value of the future cash flows equal to ________.

Question 2 5 pts

On a timeline, the space between date 0 and date 1 represents the _______ between dates. Letâs assume it is the first year of the loan. Date 0 is the beginning of the first year, and date 1 is the end of the first year.

Question 3 5 pts

As the interest rate __________, present value decreases.

Question 4 5 pts

The present value (PV) of a stream of cash flows is the _______ the present values of each individual cash flow

Question 5 5 pts

When a constant cash flow will occur at regular intervals for a finite number of periods of time, it is called a(n) __________.

Question 6 5 pts

Edit this Question Delete this Question

0 multiple_choice_question 22047052

There are two basic types of annuities:

Discounted and compounded annuities

Ordinary annuities and annuities due.

Future value and present value annuities

None of the above

Question 7 5 pts

The NPV measures the ______ change in shareholder wealth that arises from undertaking a project.

Question 8 5 pts

The Net Present Value rule implies that we should compare a projectâs net present value (NPV) to ________

Question 9 5 pts

To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one yearâs time, how much will you need to donate to endow the party?

The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =

To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one yearâs time, how much will you need to donate to endow the party?

The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =

Question 10 5 pts

With an Ordinary Annuity, payments are required at the ________ of each period. An example of this is bonds which usually pay coupon payments at the end of every six months until the bond's maturity date.

beginning

middle

end

payments are not required

limemacaw827

MandelMandel

âManufacturing, Inc. has a manufacturing machine that needsattention. The company is considering two options. Option 1 is torefurbish the current machine at a cost of $ 2,000,000. Ifârefurbished, Mandel expects the machine to last another 88 yearsand then have no residual value. Option 2 is to replace the machineat a cost of $4,200,000. A new machine would last 1010 years andhave no residual value. Mandel expects the following net cashinflows from the twoâ options:

Year	Refurbish Current	Purchase New
	Machine	Machine
1	$1,300,000	$3,840,000
2	450,000	530,000
3	340,000	420,000
4	230,000	310,000
5	120,000	200,000
6	120,000	200,000
7	120,000	200,000
8	120,000	200,000
9		200,000
10		200,000
Total	$2,800,000	$6,300,000

Compute the payback for both options. Begin by completing thepayback schedule for Option 1â (refurbish).

	Save Accounting Table...		+
	Copy to Clipboard...		+

	Net Cash Outflows	Net Cash Inflows
Year	Amount Invested	Annual	Accumulated
0	$2,000,000
1
2
3
4
5
6
7
8

â(Round your answer to one decimalâ place.)

	Save Accounting Table...		+
	Copy to Clipboard...		+

Now complete the payback schedule for Option 2â (purchase).

	Save Accounting Table...		+
	Copy to Clipboard...		+

	Net Cash Outflows	Net Cash Inflows
Year	Amount Invested	Annual	Accumulated
0	$4,200,000
1
2
3
4
5
6
7
8
9
10

â(Round your answer to one decimalâ place.)

	Save Accounting Table...		+
	Copy to Clipboard...		+

Compute the ARRâ (accounting rate ofâ return) for each of theoptions.

	Save Accounting Table...		+
	Copy to Clipboard...		+

	/	=	ARR
Refurbish	/	=		%
Purchase	/	=		%

Compute the NPV for each of the options. Begin with Option 1â(refurbish). â(Enter the factors to three decimal places. X.XXX.Use parentheses or a minus sign for a negative net presentâvalue.)

	Save Accounting Table...		+
	Copy to Clipboard...		+

		Net Cash	PV Factor	Present
Years		Inflow	(i = 14%)	Value
	Present value of each year's inflow:
1	(n = 1)
2	(n = 2)
3	(n = 3)
4	(n = 4)
5	(n = 5)
6	(n = 6)
7	(n = 7)
8	(n = 8)
	Total PV of cash inflows
0	Initial investment
	Net present value of the project

Now compute the NPV for Option 2â (purchase). â(Enter thefactors to three decimal places. X.XXX. Use parentheses or a minussign for a negative net presentâ value.)

	Save Accounting Table...		+
	Copy to Clipboard...		+

		Net Cash	PV Factor	Present
Years		Inflow	(i = 14%)	Value
	Present value of each year's inflow:
1	(n = 1)
2	(n = 2)
3	(n = 3)
4	(n = 4)
5	(n = 5)
6	(n = 6)
7	(n = 7)
8	(n = 8)
9	(n = 9)
10	(n = 10)
	Total PV of cash inflows
0	Initial investment
	Net present value of the project

â

Finally, compute the profitability index for each option.â(Round to two decimal placesâ X.XX.)

	Save Accounting Table...		+
	Copy to Clipboard...		+

	/	=	Profitability index
Refurbish	/	=
Purchase	/	=

ultramarineferret614

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the companyâs geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the companyâs financial officer.

Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine. Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $525 million today, and it will have a cash outflow of $35 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table.

Bullock Mining has a required return of 12 percent on all of its gold mines.

Provided Table below
Year	Cash Flow
0	-$525,000,000
1	$74,000,000
2	$97,000,000
3	$125,000,000
4	$157,000,000
5	$185,000,000
6	$145,000,000
7	$125,000,000
8	$102,000,000
9	-$35,000,000

Required Return: 12%

1. What type of cash flow are these for the proposed mine for Bullock Gold Mining above? Conventional or non-conventional? If non-conventional, explain what issues will occur with IRR rule

2. Calculate the Payback period below. If Bullock Gold Mining payback limit is 4 years, would they accept or reject this independent project based on Payback Period rule?

Year	Cash Flow	1st Calculate Cumulative Cash Flows	NOTES to calculate 1st each row:	2nd Calculate Payback Period (see answer below):
0	-$525,000,000
1	$74,000,000
2	$97,000,000
3	$125,000,000
4	$157,000,000
5	$185,000,000
6	$145,000,000
7	$125,000,000
8	$102,000,000
9	-$35,000,000

3. Calculate the net present value (NPV) of the proposed mine for Bullock Gold Mining below. Would they accept or reject this independent project based on NPV rule? Note: required return is 12%.

R/I%	NPV result calc/input$ below
12%

4. Calculate the internal rate of return (IRR) of the proposed mine for Bullock Gold Mining below. Would they accept or reject this independent project based on IRR rule? (Answer carefully based on answer to question 1 above). Note: required return is 12%.

R/I%	IRR result calc/input% below
12%

5. Based on your analysis, should the company open the mine? Which of the Investment Criteria calculated above (Payback, NPV and IRR) should Bullock Gold Mining use as their decision factor, and why?

grayporcupine495

ADMS 3530 Lecture Notes - Lecture 6: Gie, Discounted Cash Flow, Net Present Value

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