Reference no: EM131063577

A company is evaluating a project with the following projected cash flow characteristics. Calculate the NPV, IRR and Payback period. Assume the company requires a return greater than 9% for this project and a payback period of less than 5 years to undertake it. Based on your findings should the company undertake the project? Explain.

Year	Annual Payment	Payback Calculation
0	($75,000)
1	$5,000
2	$25,000
3	$25,000
4	$10,000
5	$50,000
6	$40,000

NPV:

IRR:

Payback period:

2. A company is evaluating between two mutually exclusive projects.  The estimated cash flows are indicated below.  Calculate the NPV and IRR for both projects.  The discount rate related to Project A is 12% and the discount rate related to Project B is 16%. 

a) Assuming the company is trying to maximize NPV which project should it undertake? 

b) Assume the company is trying to maximize the IRR, which project should it undertake?

Year	Project A	Project A
0	($100,000)	($5,000)
1	$0	$1,500
2	$0	$1,500
3	$0	$1,500
4	$0	$1,500
5	$0	$1,500
6	$250,000	$3,000

Discount Rate:   12%        16%

a) NPV:
b) IRR:

3. Below are the relevant financial statement details of a project.   Please anwer the subsequent questions.

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Income Statement:
Revenues		$300,000	$325,000	$350,000	$375,000	$400,000
Cost of Goods Sold		($180,000)	($195,000)	($210,000)	($225,000)	($240,000)
Gross Profit		$120,000	$130,000	$140,000	$150,000	$160,000
SG&A		($30,000)	($32,500)	($35,000)	($37,500)	($40,000)
Depreciation Expense		($50,000)	($50,000)	($50,000)	($50,000)	($50,000)
Operating Income		$40,000	$47,500	$55,000	$62,500	$70,000
Taxes		($16,000)	($19,000)	($22,000)	($25,000)	($28,000)
Net Income		$24,000	$28,500	$33,000	$37,500	$42,000
Balance Sheet Items:
Investments in equipment	($250,000)	$0	$0	$0	$0	$0
Investment in working capital	($25,000)	($2,500)	($2,500)	($2,500)	($2,500)	$25,000
Net Balance Sheet Changes	($275,000)	($2,500)	($2,500)	($2,500)	($2,500)	$25,000

a. Calculate the projected cash flows.

b. If the company requires a rate of return of at least 12% should it accept this project?

c. "Assume the following scenario: 

i) SG&A increases by 20% in each year,

ii) Investment in equipment in Year 0 increases by 50%

Should the company accept the project in this scenario?

Note, the increase in the initial investment in equipment will require a corresponding change in the Depreciation.  The equipment is depreciated in a straight-line and has no value remaining at the end of the project."