Reference no: EM133022210
Question - a. Isaac Ramos is considering investing in one of the following two projects. Either project will require an investment of $20,000. The expected cash flows for the two projects follow. Assume that each project is depreciable.
|
Year
|
Project A
|
Project B
|
|
1
|
$6,000
|
$6,000
|
|
2
|
8,000
|
8,000
|
|
3
|
10,000
|
10,000
|
|
4
|
10,000
|
3,000
|
|
5
|
10,000
|
3,000
|
b. Inka Lame is retiring and has the option to take her retirement as a lump sum of $450,000 or to receive $30,000 per year for 20 years. Inka's required rate of return is 6 percent.
c. Ahmad Sajadi is interested in investing in some tools and equipment so that he can do independent drywalling. The cost of the tools and equipment is $30,000. He estimates that the return from owning his own equipment will be $9,000 per year. The tools and equipment will last six years.
d. Patsy Folson is evaluating what appears to be an attractive opportunity. She is currently the owner of a small manufacturing company and has the opportunity to acquire another small company's equipment that would provide production of a part currently purchased externally. She estimates that the savings from internal production will be $75,000 per year. She estimates that the equipment will last 10 years. The owner is asking $400,000 for the equipment. Her company's cost of capital is 8 percent.
Required -
1. Assuming that Inka Lame will live for another 20 years, should she take the lump sum or the annuity?
2. Assuming a required rate of return of 8 percent for Abmad Sajadi, calculate the NPV of the investment. Should Ahmad invest?
3. Calculate the IRR for Patsy Folson's project. Should Patsy acquire the equipment?