Problem #1. Answer the following questions concisely. 5points each; 20 points

What is the essence of the discounted cash flow methods?

The trouble with discounted cash flow techniques is that they ignore depreciation costs. Do you agree? Explain.

What aspects of business are considered by the net present value method and what are its underlying assumptions?

Does the IRR method make significantly different decisions than does the NPV method? Why or why not?

Problem #2 (10 points) NPV

	Number of years
	8	18	20	28
Amount of annual cash inflow*	$10,000	(b) $ _______	$9,000	$8,000
Cost of initial investment	(a) $ _______	$$60,000	$65,000	$30,000
Required rate of return	14%	17%	(c ) ____%	15%
NPV	$5,613	$50,678	$6,667	(d) $ ____

To be received at the end of each year. Use Table 2 (present value factors for annuity cashflow) for this problem.

Problem #3 (10 points)

Company XYZ wants to purchase a new IT, which will cost $120,000. The company will lease the equipment to a customer who has agreed to pay a leasing fee at the end of each of the next four years of $50,000. If the required rate of return (RRR) is 10%, is this a good investment for the Company XYZ? Use NPV analysis to prove your point.

Problem #4 (10 points)

Assume in Problem #3, the required rate of return (RRR) changes to 17%. Is this a good investment for Company XYZ? Use NPV analysis to prove your point.

Problem #5 (20 points)

XYZ Company is considering an investment in a new system that costs $36,048 and would result in cash savings per year of $10,000 per year for five years. The companys cost of capital (required rate of return) is 10%.

Compute the projects NPV at 10%, 12%, and 14 %.

Use Excel to compute the projects IRR. (Enter all cash flows and cost, insert IRR function).

Suppose the company uses the NPV method. Would it accept the project? Why or why not?

Suppose the company uses the IRR method. Would it accept the project? Why or why not?

Problem 6 (30 points)

The Marketing department is considering buying, at a cost of $160,000, a new CRM (customer relationship management) module, that is expected to save $50,000 in cash-operating costs per year for marketing activities. Its estimated useful life is 5 years, and it will have $0 terminal disposal value. The required rate of return is 12%.

Compute: (a) net present value, (b) internal rate of return, (c) payback period, and (d) accounting rate of return based on initial investment (assume straight-line depreciation). (e) Based on the required rate of return and a 3-year cutoff period, how do you use the results of the four financial methods to guide your decision for this investment?