13. Crane Ltd. expects cash flows from a new project to be $25,000 per year for the next 5 years. The project will require an initial investment of $70,000. Determine the project's NPV if the cost of capital on such projects is 10%. Calculate the IRR. NPV =$24,769.67 Accept NPV >0 IRR =23.06% Accept IRR >R=10% 14. Calculate the NPV of a project that has an initial investment of $65,000 and has one cash flow occurring 8 years from now of $250,000. Use a discount rate of 15%. Should you invest in the project? Calculate the PI. NPV=$16,725AcceptPI>1AcceptNPV>0PI=1.257 15. A new project requires an initial investment of $45,000. Annual net cash flows of $15,000 are expected. Calculate the payback period. 3 years 16. Calculate the NPV of a project that requires an initial cash outlay of $500,000 and generates annual cash flows of $102,500 for 7 years. Use a discount rate of 12%. Calculate the IRR. NPV=S32,214.959.94%RejectNPV0AcceptIRR>R=8%IRR= Now assume that Clark Coop projects the cash flows will occur in the reverse: $140,000 in year 1,$50,000 in years 24, and $75,000 in year 5 . Use a discount rate of 8% and compute the project NPV. Compute the IRR for the project as well. NPV=$49,983.42AcceptNPV>0IRR=16.65%AcceptIRR>R=8% How did NPV and IRR change, if they did at all? What does this tell you about effect of the structure (timing/size) of CFs on NPV/IRR/PI, etc. 18. Brian Industries is considering a project expected to generate the following cash flows: $15,000 in the first 3 years of the project and $20,000 in the fourth year. Additionally, the project requires land reclamation costs at end of the project (year 5) of $25,000 (cash outlay). The project requires an initial investment of $10,000. Using a discount rate of 8%, what is the NPV of the project? Calculate 19. Calculate the IRR of a project generating the following cash flows: $40,000 in years 24 and $50,000 in years 6-7. The project requires an initial investment of $175,000. Should they invest in the project if they require a return of 10% ? IRR =5.21% Reject IRR 0 21. Which of the following should be accepted if the projects are mutually exclusive based on the profitability index? What if the projects are independent? Mutually Exclusive: Project C - highest PI Independent: All Projects - PI >1 (NPV >0 ) 22. Capital rationing implies that: the firm has more than enough funds to select any and all acceptable projects. the firm has limited funds available for investment. the firm has no acceptable projects available. the CEO is a penny-pincher. 23. A firm is financed with 70% equity and 30% debt. If the cost of equity capital is 12% and the cost of debt is 10%, what is the weighted average cost of capital (WACC) for the firm? Assume a tax rate of 21%. 10.77% 24. A firm has 4 million common shares outstanding which are currently trading at $15 per share. The firm also has $40 million in outstanding debt. What are the percentage weights for each source of capital for the firm? Equity: 60% Debt: 40% 25. Maverick's Toys recently issued preferred stock at $50 per share. The stock pays a $2.50 dividend annually. What is the firm's cost of preferred equity capital? 5% 26. Emmy's Communications has bonds currently trading at $950 each. The bonds pay coupons semiannually and mature in 10 ycars. The coupon rate on the bonds is 4% and the firm is in the 21% tax bracket. What is the firm's cost of debt? What is the after-tax cost of debt? Cost of debt: 4.63% After-tax Cost of debt: 3.66%