Exercise Chapter 7 & 8

Question 1

Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment will be RM18,250 and the project is expected to yield after-tax cash inflows of RM4,000 per year for seven years. The firm has a 10 percent cost of capital.

a) Determine the net present value (NPV) for the project.

b) Determine the internal rate of return (IRR) for the project.

c) Would you recommend the firm accept or reject the project? Explain your answer.

Question 2

Rieger International is attempting to evaluate the feasibility of investing RM95,000 in a piece of equipment having a five-year life. The firm has estimated the cash inflows associated with the proposal as follows:

Year	Cash inflows (RM)
1	20,000
2	25,000
3	30,000
4	35,000
5	40,000

The firm has a 12 percent cost of capital.

a) Calculate the payback period for the proposed investment.

b) Calculate the net present value (NPV) for the proposed investment.

c) Calculate the internal rate of return (IRR), rounded to the nearest whole percent, for the proposed investment.

d) Evaluate the acceptability of the proposed investment using NPV and IRR.

Question 3

Pound Industries is attempting to select the best three mutually exclusive projects. The initial investment and after-tax cash inflows associated with each project are given in the following table.

Cash flows	Project A	Project B	Project C
Initial investment	RM60,000	RM100,000	RM110,000
Cash inflows, years 1 - 5	RM20,000	RM31,500	RM32,500

a) Calculate the payback period for each project.

b) Calculate the net present value (NPV) of each project, assuming that the firm has discount rate of 13 percent.

c) Calculate the internal rate of return (IRR) for each project.

d) Draw the net present value profile of each project on the same set of axes and discuss any conflict in ranking that may exist between NPV and IRR.

e) Summarize the preferences and indicate which project you would recommend. Explain why.