Reference no: EM133108178
PROBLEM 1 - Ursus, Inc., is considering a project that would have a ten-year life and would require a $1,000,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows:
Sales $2,000,000
Variable Expenses 1,400,000
Contribution margin 600,000
Fixed expenses 400,000
Net operating income $200,000
All of the above items, except for depreciation of $100,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company's required rate of return is 12%.
Required -
a. Compute the project's net present value.
b. Compute the project's internal rate of return to the nearest whole percent.
c. Compute the project's payback period.
d. Compute the project's simple rate of return.
PROBLEM 2 - Prince Company's required rate of return is 10%. The company is considering the purchase of three machines, as indicated below. Consider each machine independently.
Required -
a. Machine A will cost $25,000 and have a life of 15 years. Its salvage value will be $1,000, and cost savings are projected at $3,500 per year. Compute the machine's net present value.
b. How much will Prince Company be willing to pay for Machine B if the machine promises annual cash inflows of $5,000 per year for 8 years?
PROBLEM 3 - The following data concern an investment project:
Investment in equipment $16,000
Annual Net cash inflows $3,600
Working capital required $4,500
Salvage value of equipment $2,000
Life of the project 12 years
Discount rate 14%
The working capital will be released for use elsewhere at the conclusion of the project.
Required - Compute the project's net present value.
PROBLEM 4 - Bradley Company's required rate of return is 14%. The company has an opportunity to be the exclusive distributor of a very popular consumer item. No new equipment would be needed, but the company would have to use one-fourth of the space in a warehouse it owns. The warehouse cost $200,000 new. The warehouse is currently half-empty and there are no other plans to use the empty space. In addition, the company would have to invest $100,000 in working capital to carry inventories and accounts receivable for the new product line. The company would have the distributorship for only 5 years. The distributorship would generate a $17,000 annual net cash inflow.
Required -
a. What is the net present value of the project at a discount rate of 14 per cent?
b. Should be project be accepted?
PROBLEM 5 - Monson Company is considering three investment opportunities with cash flows as described below:
Project A:
Cash investment now $15,000
Cash inflow at the end of 5 years $21,000
Cash inflow at the end of 8 years $21,000
Project B:
Cash investment now $11,000
Annual cash outflow for 5 years $3,000
Additional cash inflow at the end of 5 years $21,000
Project C:
Cash investment now $21,000
Annual cash inflow for 4 years $11,000
Cash outflow at the end of 3 years $5,000
Additional cash inflow at the end of 4 years $15,000
Required - Compute the net present value of each project assuming Monson Company uses a 12% discount rate.
PROBLEM 6 - Masone Inc. has provided the following data concerning a proposed investment project:
Initial investment $630,000
Life of the project 6 years
Annual net cash inflows $189,000
Salvage value $32,000
The company uses a discount rate of 10%.
Required - Compute the net present value of the project.
PROBLEM 7 - Furner Inc. is considering investing in a project that would require an initial investment of $480,000. The life of the project would be 8 years. The annual net cash inflows from the project would be $120,000. The salvage value of the assets at the end of the project would be $72,000. The company uses a discount rate of 17%.
Required - Compute the net present value of the project.