Having trouble understanding these problems solutions with work would be greatly appreciated

FIN 325: Homework 9 1) What is the payback period for the following set of cash flows? Year Cash Flow 0 ($7,600) 1 $1,900 2 $2,900 3 $2,300 4 $1,700 2) An investment project provides cash inflows of $675 per year for 8 years. What is the project's payback period if the initial cost is $1,700? What if the initial cost is $3,300? What if the initial cost is $5,600? Year Cash Flow 0 ($1,700) 1 $675 2 $675 3 $675 4 $675 Year Cash Flow 0 ($3,300) 1 $675 2 $675 3 $675 4 $675 Year Cash Flow 0 ($5,600) 1 $675 2 $675 3 $675 5 $675 5 $675 4 $675 5 $675 6 $675 6 $675 7 $675 7 $675 6 $675 7 $675 3) Siva, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Year Project A Cash Flows Project B Cash Flows 0 ($45,000 ) ($55,000 ) 1 $16,00 0 $13,00 0 2 $21,00 0 $15,00 0 3 $15,00 0 $24,00 0 4 $9,000 $255,00 0 Page 1 of 10 8 $675 8 $675 8 $675 4) An investment project has annual cash inflows of $2,800, $3,700, $5,100, and $4,300, for the next four years, respectively. The initial cost (at time zero) is $5,200. The discount rate is 14%. What is the discounted payback period for these cash flows? What is the discounted payback period if the discount rate is 16%? What is the discounted payback period if the discount rate is 20%? 5) An investment project costs $14,000 and has annual cash flows of $3,700 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5%? What if the discount rate is 19%? 6) A firm evaluates all of its projects by applying the IRR rule. If the required return is 14%, should the firm accept the following project? Year Cash Flows 0 ($26,000) 1 $11,000 2 $14,000 3 $10,000 Page 2 of 10 7) For the cash flows in the previous problem (#7), suppose the firm uses the NPV rule for evaluation purposes. At a required return of 11%, what is the Net Present Value (NPV) of the project? At a required return of 24%, what is the Net Present Value (NPV) of the project? 8) A project that provides annual cash flows of $15,400 for nine year costs $67,000 to implement today. Is this a good project if the required return is 8%? What if it is 20%? At what discount rate would you be indifferent between accepting the project and rejecting it? Page 3 of 10 9) What is the IRR of the following set of cash flows? Year Cash Flows 0 ($13,900) 1 $6,400 2 $8,700 3 $5,900 10) For the cash flows in the previous problem (#9), what is the NPV at a discount rate of 0%? If the discount rate is 20%? If the discount rate is 30%? Page 4 of 10 11) Garage, Inc. has identified the following two mutually exclusive projects: Year Project A Cash Flows Project B Cash Flows 0 ($43,500) ($43,500) 1 $21,400 $6,400 2 $18,500 $14,700 3 $13,800 $22,800 4 $7,600 $25,200 a) What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? b) If the required return for both projects is 11%, what is the NPV for each of these projects? Using the NPV decision rule, which of the two projects should the company accept? c) Over what range of discount rates would the company choose project A? Project B? At what discount rate would the company be indifferent between the two projects? Use the following information for questions 12 through 16 Consider the following two mutually exclusive investment projects; the required return is 11% for both projects. Page 5 of 10 Year Project A Cash Flow Project B Cash Flow 0 ($455,000 ) ($65,000) 1 $58,00 0 $31,00 0 2 $85,00 0 $28,00 0 3 $85,00 0 $25,50 0 4 $572,00 0 $19,000 12) If you apply the payback period criterion, which investment project will you choose? 13) If you apply the discounted payback period criterion, which investment project will you choose? 14) If you apply the NPV criterion, which investment project will you choose? 15) If you apply the IRR criterion, which investment project will you choose? 16) Based on your answer to questions 12 through 15, which project will you finally accept? Page 6 of 10 17) Consider an investment project with the following projected cash flows. Year Cash Flow 0 $ (10,000) 1 $ 4,000 2 $ 4,000 3 $ 4,000 4 $ 4,000 Complete the following table relating the project's net present value (NPV) with the required rate of return. Graph the NPV of this project as a function of the applicable discount rate. r NPV 0% 3% 6% 9% 12% 15% 18% 21% 24% 27% 30% Page 7 of 10 18) Refer to question #17. Within what range of discount rates must the internal rate of return for this project fall? 19) Imagine two proposed investment projects, A and B. These projects are mutually exclusive. Project A will require an initial investment of $25,000 and is expected to deliver annual incremental cash flows of $7,000. Project B will require an initial outlay of $4,000 and is expected to deliver incremental annual cash flows of $1,200. Both projects are expected to last for 5 years. (That is, the initial outlay will occur today, and the cash inflows will last for 5 years, with the initial inflow coming 1 year from now.) The required return for both projects is 10%. a) Determine the net present value for each project. b) Determine the internal rate of return for each project. Page 8 of 10 c) Do the NPV and IRR decision rules agree? If they do not, suggest a reason why they disagree. d) Which project would you recommend? 20) A firm is considering investing $10,000 in some investment project which is expected to deliver incremental annual cash flows equal to $2,400 for a period of 8 years. At the end of 8 years, the project will be shut down and no further cash flows will occur. The required return for this project is 10%. a) What is this project's expected payback period? b) What is this project's expected discounted payback period? c) What is this project's expected net present value (NPV)? d) What is this project's expected profitability index (PI)? e) What is this project's expected internal rate of return (IRR)? f) Would you recommend undertaking this particular project? Why? Page 9 of 10 Page 10 of 10