1. Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$200,000 -$120,000 1 $35,000 $28,000 2 $56,000 $45,000 3 $75,000 $50,000 4 $140,000 $86,000 Whichever project you choose, if any, you require a 15% return on your investment. a) If you apply the payback criterion, which investment will you choose? Why? (2 marks) b) If you apply the discounted payback criterion, which investment will you choose? Why? (2 marks) c) If you apply the NPV criterion, which investment will you choose? Why? (3 marks) d) If you apply the profitability index criterion, which investment will you choose? Why? (2 marks) e) If you apply the IRR criterion, which investment will you choose? Why? (2 marks) f) What is the cross-over rate for these two mutually exclusive projects? (3 marks) Based on your answers in (a) through (e), which project will you finally choose? Why? (2 marks)
2. Show the breakdown of stock price between a firm's assets that are already in place and its present value of growth opportunities, assuming: next year's expected earnings equal $6.00, 13 percent required rate of return, 15 percent return on equity, 55 percent plowback ratio. (4 marks)
3. What is the maximum internal growth rate consistent with not requiring external funding for a firm reporting net income of $350,000, a dividend payout ratio of 60%, and total assets of $4.5 million? (3 marks)
4. A new machine costs $15,000 and will cost $5,000 a year to operate and maintain. If the discount rate is 10% and the machine lasts for 5 years, what is its equivalent annual cost? (4 marks)