Reference no: EM132554625

                PROJECT A             PROJECT B

YEAR          CASH FLOW              CASH FLOW

0                -$80,300                 -$77,900

1               $25,500                      $25,000

2                    $14,000                 $13,000

3                   $47,800                   $46,000

Question 1: A proposed project lasts 3 years and has an initial investment of $500,000. The after-tax cash flows are estimated at $120,000 for year 1, $240,000 for year 2, and $240,000 for year 3. The firm has a target debt/equity ratio of 0.6. The firm's cost of equity is 15% and its cost of debt is 8%. The tax rate is 35%. What is the NPV of this project? (hint: remember that the D/E is saying that debt is 60% of equity. In other words, you need to find D/A and E/A for the appropriate weights.)

Question 2: Puppy Inc. has the following mutually exclusive investment opportunities. If the appropriate discount rate was 15% what should you do?

YEAR          PROJECT X               PROJECT Y

0                     -500                   -800

1                       100                    500

2                       475                   350

3                         50                  350

Question 3: Calculates each project's payback period cutoff. Which would you accept if Puppy's payback period cutoff is 2 years?

Question 4: Calculate each project's discounted payback period cutoff. Which would you accept if Puppy's payback period cutoff is 2 years?

Question 5: What is the NPV for each project?

Question 6: Consider the following two mutually exclusive projects.