Chapter 10 HW Questions

Note: For each non-excel question, you must provide your source in the proper APA

format.

Reminder: If you DO NOT have a formula within your answer cell, it will not be marked

correct! You must show your work within the excel formula!

1.

[EXCEL]

Net present value: Riggs Corp. management is planning to spend

$650,000 on a new marketing campaign. They believe that this action will result in

additional cash flows of $325,000 over the next three years. If the discount rate is

17.5 percent, what is the NPV on this project?

2.

[EXCEL]

Net present value: Kingston, Inc. management is considering purchasing

a new machine at a cost of $4,133,250. They expect this equipment to produce cash

flows of $814,322, $863,275, $937,250, $1,017,112, $1,212,960, and $1,225,000

over the next six years. If the appropriate discount rate is 15 percent, what is the

NPV of this investment?

3.

[EXCEL]

Net present value: Crescent Industries management is planning to

replace some existing machinery in its plant. The cost of the new equipment and the

resulting cash flows are shown in the accompanying table. If the firm uses an 18

percent discount rate for projects like this, should management go ahead with the

project?

Year

Cash Flow

0

$3,300,000

1

875,123

2

966,222

3

1,145,000

4

1,250,399

5

1,504,445

4.

[EXCEL]

Net present value: Management of Franklin Mints, a confectioner, is

considering purchasing a new jelly bean-making machine at a cost of $312,500.

They project that the cash flows from this investment will be $121,450 for the next

seven years. If the appropriate discount rate is 14 percent, what is the NPV for the

project?

5.

[EXCEL]

Net present value: Blanda Incorporated management is considering

investing in two alternative production systems. The systems are mutually

exclusive, and the cost of the new equipment and the resulting cash flows are shown

in the accompanying table. If the firm uses a 9 percent discount rate for production

system projects, in which system should the firm invest?

Year

System 1

System 2

0

$15,000

$45,000

1

15,000

32,000

2

15,000

32,000

3

15,000

32,000

6.

[EXCEL]

Payback: Refer to Problem 5. What are the payback periods for

production systems 1 and 2? If the systems are mutually exclusive and the firm

always chooses projects with the lowest payback period, in which system should the

firm invest?

7.

[EXCEL]

Payback: Quebec, Inc., is purchasing machinery at a cost of $3,768,966.

The company's management expects the machinery to produce cash flows of

$979,225, $1,158,886, and $1,881,497 over the next three years, respectively. What

is the payback period?

8.

[EXCEL]

Payback: Northern Specialties just purchased inventory-management

computer software at a cost of $1,645,276. Cost savings from the investment over

the next six years will produce the following cash flow stream: $212,455, $292,333,

$387,479, $516,345, $645,766, and $618,325. What is the payback period on this

investment?

9.

[EXCEL]

Payback: Nakamichi Bancorp has made an investment in banking

software at a cost of $1,875,000. Management expects productivity gains and cost

savings over the next several years. If, as a result of this investment, the firm is

expected to generate additional cash flows of $586,212, $713,277, $431,199, and

$318,697 over the next four years, what is the investment's payback period?

10.

[EXCEL]

Average accounting rate of return (ARR): Capitol Corp. management is

expecting a project to generate after-tax income of $63,435 in each of the next three

years. The average book value of the project's equipment over that period will be

$212,500. If the firm's investment decision on any project is based on an ARR of 37.5

percent, should this project be accepted?

11.

[EXCEL]

Internal rate of return: Refer to Problem 4. What is the IRR that

Franklin Mints management can expect on this project?

12.

[EXCEL]

Internal rate of return: Hathaway, Inc., a resort management company,

is refurbishing one of its hotels at a cost of $7.8 million. Management expects that

this will lead to additional cash flows of $1.8 million for the next six years. What is

the IRR of this project? If the appropriate cost of capital is 12 percent, should

Hathway go ahead with this project?

13. Profitability index: What is the profitability index, and why is it helpful in the

capital rationing process?