Capital Budgeting

1. A project that provides annual cash flows of $1,930 for 8 years costs $7,700 today.

Requirement 1:

At a required return of 8 percent, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

  NPV

  $   

Requirement 2:

At a required return of 24 percent, what is the NPV of the project? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)

  NPV

  $   

Requirement 3:

At what discount rate would you be indifferent between accepting the project and rejecting it? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Discount rate

 %  

2. Romboski, LLC, has identified the following two mutually exclusive projects:

Year

Cash Flow (A)

Cash Flow (B)

0

−$

65,000

−$

65,000

1

34,000

19,000

2

27,000

25,000

3

21,000

29,000

4

17,000

34,000

Requirement 1:

(a)

What is the IRR for each of these projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Internal rate of return

  Project A

 %   

  Project B

 %   

(b)

If you apply the IRR decision rule, which project should the company accept?

Requirement 2:

(a)

Assume the required return is 11 percent. What is the NPV for each of these projects? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

Net present value

  Project A

$     

  Project B

$     

(b)

Which project will you choose if you apply the NPV decision rule?

Requirement 3:

(a)

Over what range of discount rates would you choose Project A? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Project A

@  %  

(b)

Over what range of discount rates would you choose Project B? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g.,32.16).)

  Project B

@  %  

(c)

At what discount rate would you be indifferent between these two projects? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Discount rate

 %  

3. Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 15 percent.

Year

Project M

Project N

0

–$125,000     

–$310,000     

1

57,000     

135,000     

2

64,000     

161,000     

3

59,000     

129,000     

4

34,000     

92,000     

Required:

(a)

What is the IRR for each project? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  IRR  

  Project M

 %  

  Project N

 %  

(b)

What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

      NPV  

  Project M

$   

  Project N

$   

(c)

Which, if either, of the projects should the company accept?

4. The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of $109,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5.1 percent per year forever. The project requires an initial investment of $1,425,000.

Required:

(a)

If Yurdone requires a return of 12 percent on such undertakings, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

  NPV

$   

(b)

Should the cemetery business be started?

(c)

The company is somewhat unsure about the assumption of a growth rate of 5.1 percent its cash flows. At what constant growth rate would the company just break even if it still required a return of 12 percent on its investment? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimalplaces (e.g., 32.16).)

  Minimum growth rate

 %  

Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:

Year

 Cash Flow

0

–$690,000   

1

243,000   

2

175,000   

3

256,000   

4

231,000   

5. All cash flows will occur in Erewhon and are expressed in dollars. In an attempt to improve its economy, the Erewhonian government has declared that all cash flows created by a foreign company are “blocked” and must be reinvested with the government for one year. The reinvestment rate for these funds is 4 percent. Assume Anderson uses a required return of 10 percent on this project.

Requirement 1:

What is the NPV of the project? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)

  Net present value

$   

Requirement 2:

What is the IRR of the project? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  Internal rate of return

 %