APPLY THE CONCEPTS: Net present value
Project A
This project requires an initial investment of $194,400. Theproject will have a life of 4 years. Annual revenues associatedwith the project will be $75,000 and expenses associated with theproject will be $15,000 for an annual net cash flow of $.
Note: Enter cash flows as positive numbers.
Cash Flows Year 0 -$194,400 Year 1 Year 2 Year 3 Year 4
Project B
This project requires an initial investment of $220,155. Theproject will have a life of 4 years. Annual revenues associatedwith the project will be $80,000, and expenses associated with theproject will be $15,000, for an annual net cash flow of $.
Cash Flows Year 0 -$220,155 Year 1 Year 2 Year 3 Year 4
The cost of capital for the company is 8%.
Present Value Tables
Present Value of $1 (a single sum) at Compound Interest.
Present Value of an Annuity of $1 at Compound Interest.
Use the minus sign to indicate a negative NPV. If an amount iszero, enter"0".
Project A NPV Analysis Year Cash Flow Discount Factor Present Value 0 $194,400 1.000 $194,400 1â4 60,000 select3.3120.7353.037Correct 11 of Item 4 NPV $
Project B NPV Analysis Year Cash Flow Discount Factor Present Value 0 $220,155 1.000 $220,155 1â4 65,000 select3.3120.7353.037Correct 14 of Item 4 NPV $
Based upon net present value, which project has the morefavorable profit prospects?
selectProject AProject BEither projectCorrect 17 of Item 4
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APPLY THE CONCEPTS: Internal rate of return
Calculate the internal rate of return for Project A and ProjectB (defined previously). Enter the IRR with the percent sign (i.e.4%).
Project A: IRR Analysis
With an initial investment of $194,400 and annual cash flows of$, the internal rate of return for Project A is .
Project B: IRR Analysis
With an intial investment of $220,155 and annual cash flows of$, the internal rate of return for Project B is .
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APPLY THE CONCEPTS: Net present value
Project A
This project requires an initial investment of $194,400. Theproject will have a life of 4 years. Annual revenues associatedwith the project will be $75,000 and expenses associated with theproject will be $15,000 for an annual net cash flow of $.
Note: Enter cash flows as positive numbers.
| Cash Flows | ||
| Year 0 | -$194,400 | |
| Year 1 | ||
| Year 2 | ||
| Year 3 | ||
| Year 4 | ||
Project B
This project requires an initial investment of $220,155. Theproject will have a life of 4 years. Annual revenues associatedwith the project will be $80,000, and expenses associated with theproject will be $15,000, for an annual net cash flow of $.
| Cash Flows | ||
| Year 0 | -$220,155 | |
| Year 1 | ||
| Year 2 | ||
| Year 3 | ||
| Year 4 | ||
The cost of capital for the company is 8%.
Present Value Tables
Present Value of $1 (a single sum) at Compound Interest.
Present Value of an Annuity of $1 at Compound Interest.
Use the minus sign to indicate a negative NPV. If an amount iszero, enter"0".
| Project A NPV Analysis | |||||||||
| Year | Cash Flow | Discount Factor | Present Value | ||||||
| 0 | $194,400 | 1.000 | $194,400 | ||||||
| 1â4 | 60,000 | select3.3120.7353.037Correct 11 of Item 4 | |||||||
| NPV | $ | ||||||||
| Project B NPV Analysis | |||||||||
| Year | Cash Flow | Discount Factor | Present Value | ||||||
| 0 | $220,155 | 1.000 | $220,155 | ||||||
| 1â4 | 65,000 | select3.3120.7353.037Correct 14 of Item 4 | |||||||
| NPV | $ | ||||||||
Based upon net present value, which project has the morefavorable profit prospects?
selectProject AProject BEither projectCorrect 17 of Item 4
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APPLY THE CONCEPTS: Internal rate of return
Calculate the internal rate of return for Project A and ProjectB (defined previously). Enter the IRR with the percent sign (i.e.4%).
Project A: IRR Analysis
With an initial investment of $194,400 and annual cash flows of$, the internal rate of return for Project A is .
Project B: IRR Analysis
With an intial investment of $220,155 and annual cash flows of$, the internal rate of return for Project B is .
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Related questions
Summer Tyme, Inc., is considering a new 3-year expansion projectthat requires an initial fixed asset investment of $1.62 million.The fixed asset will be depreciated straight-line to zero over its3-year tax life, after which time it will be sold for $126,000. Theproject requires an initial investment in net working capital of$180,000, all of which is recovered at the end of the project. Theproject is estimated to generate $1,440,000 in annual sales, withcosts of $576,000. The tax rate is 33 percent and the requiredreturn on the project is 11 percent.
| What is the project's year 0 net cash flow?HINT: This will not include OCF
|
Fimbrez Corporation has provided the following data concerningan investment project that it is considering:
| Initialinvestment | $220,000 | |
| Annual cash flow | $129,000 | per year |
| Expected life of theproject | 4 | years |
| Discount rate | 9% |
| Click here to view Exhibit 13B-1and Exhibit 13B-2, to determine the appropriate discount factor(s)using table. |
| The net present value of the project is closest to A.$197,831 B.$220,000 C.$(91,000) D.$(197,831) |
