- Calculating NPV. For the cash flows in the previous problem, suppose the firm
uses the NPV decision rule. At a required return of 10%, should the firm
accept this project? What if the
return was 21 percent? (Use previous problem below to answer
problem #1, but do not solve previous problem below).
(Do not do) PREVIOUS PROBLEM: Calculating IRR. A firm evaluates
all of its projects by applying the IRR rule.
If the required return is 13 percent, should the firm accept the
following project?
YEAR CASH FLOW
0 -$145,000
1 71,000
2 68,000
3 52,000
- Calculating IRR. What
is the IRR of the following set of cash flows?
YEAR CASH FLOW IRR
0 -$32,000
1 13,200
2 18,500
3 10,600
- Problems with Profitability Index. The
Matterhorn Corporation is trying to choose between the following two
mutually exclusive design projects:
YEAR
CASH FLOW (1) CASH
FLOW (11)
0 -$72,000 -$30,000
1 27,000 9,000
2 32,000 19,500
3 38,000 13,500
- If the required return is 11
percent and the company applies the profitability index decision rule,
which project should the firm accept? - If the company applies the NPV
decision rule, which project should it take? - Explain why your answers in (a)
and (b) are different.
- Relevant Cash Flows. Winnebagel Corp. currently sells 28, 000 motor homes per year
at $73, 000 each and 7,000 luxury motor coaches per year at $115,000 each.
The company wants to introduce a new portable camper to fill its product
line; it hopes to sell 23,000 of these campers per year at $19,000 each.
An independent consultant has determined that if Winnebagel introduces the
new campers, it should boost the sales of its existing motor homes by
2,600 units per year and reduce the sales of its motor coaches by 850
units per year. What is the amount
to use as the annual sales figure when evaluating this project? Why?
- Calculating Project OCF.
Herrera Music Company is considering the
sale of a new sound board used in recording studios. The new board would
sell for $25,000, and the company expects to sell 1,400 per year. The
company currently sells 1,900 units of its existing model per year. If the
new model is introduced, sales of the existing model will fall to 1,720
units per year. The old board retails for $21,400. Variable costs are 55
percent of sales, depreciation on the equipment to produce the new board
will be $1,350,000 per year, and fixed costs are $1,250,000 per year. If
the tax rate is 38 percent, what is the annual OCF for the project?
IN WORD 2003, .doc:
PLEASE REPLY TO EACH PROBLEM, ON THIS SAME SHEET IN HIGHLITED FORM, AFTER THE
QUESTION, IN SENTENCE FORM.
ALSO, PLEASSE INCLUDE AN EXCEL VERSION OF THE
SOLUTIONS.
Thank you very much!
