A manager of the engineering department of Manchester University

11-A2.

A manager of the engineering department of Manchester University is contemplating acquiring 120 computers. The computers will cost $240,000 cash, have zero terminal salvage value, and a useful life of 3 years. Annual cash savings from operations will be $110,000. The required rate of return is 14%. There are no taxes.

1.       Compute the NPV.

2.       Should the engineering department acquire the computers? Explain

11-37

City View Restaurant is about to open at a new location. Operating plans indicate the following expected cash flows:

Initial investment now                                                $235,000                                         $ ------

End of year: 1                                                                $150,000                                        $200,000

                      2                                                                $200,000                                        $250,000

                      3                                                                $250,000                                        $300,000

                      4                                                               $300,000                                         $450,000

1.       Compute the NPV for all these cash flows. This should be a single amount. Use a discount rate of 14%.

2.       Suppose the minimum desired rate was 12%. Without further calculations, determine whether the NPV is positive or negative Explain.