1.

Consider the following cash flows:

Year

Cash Flow

Bal after
pmt:

Payback=

3,300

1750

1,550

5050

=2.61
years

1,250

6600

$6,000

1,750

2+(950/15
50)

7850
Required:
What is the payback period for the above set of cash flows? 2.61 years

2.

An investment project provides cash inflows of $1,100 per year for eight years.

CF0
Requirement 1:
4800
What is the project payback period if the initial cost is $3,750?
Payback period

years
3.10

3750
9800

CF1 1100

1100

CF2 1100

2200

CF3 1100

3300

Requirement 2:
What is the project payback period if the initial cost is $4,800? CF4 1100

4400
4+(400/1100)

Payback period

years
4.07

CF51100

5500

CF6 1100

6600

Requirement 3:
CF7 1100
What is the project payback period if the initial cost is $9,800?

7700

Payback period

years
0

CF8 1100
Never

8800

=3+(450/1100)
=

3.

Global Toys, Inc., imposes a payback cutoff of three years for its international investment projects.
Assume the company has the following two projects available.

Year
0
1
2
3
4

Cash Flow A
$ 61,000
25,000
32,600
27,000
13,000

Cash Flow B
$ 106,000
27,000
32,000
27,000
234,000

Requirement 1:
What is the payback period for each project? Write payback bal per year

Payback period
years

Project A

2.13

years

Project B

3.09

Requirement 2:
Should it accept either of them?
Project A pays back sooner than Project B
Accept project A and reject project B

4.
Year
0
1
2
3

A firm evaluates all of its projects by applying the IRR rule.

Cash Flow
152,000
64,000
75,000
59,000

Requirement 1:
What is the project's IRR? Enter CFs in calc hit IRR, CPT

Internal rate of return

14.66

Requirement 2:
If the required return is 13 percent, should the firm accept the project?
14.66 > 13 the return is more than the cost (this also means NPV must be positive and
Yes

PI must be > 1 so we accept.

5.
Year
0
1
2
3

For the given cash flows, suppose the firm uses the NPV decision rule.

Cash Flow
162,000
54,000
85,000
69,000

Requirement 1:
At a required return of 8 percent, what is the NPV of the project? Enter CFs in cal hit NPV enter 8 as I down npv
CPT mind the sign

NPV

15648.2

Requirement 2:
At a required return of 20 percent, what is the NPV of the project? Enter CFs in cal hit NPV enter 8 as I down npv
CPT mind the sign

NPV

6.

-18041.

A project that provides annual cash flows of $2,400 for nine years costs $9,900 today.

Requirement 1:

At a required return of 8 percent, what is the NPV of the project? Enter CFs in cal hit NPV enter 8 as I down npv
CPT mind the sign

NPV

5092.53

Requirement 2:
At a required return of 24 percent, what is the NPV of the project? Enter CFs in cal hit NPV enter 8 as I down npv
CPT mind the sign

NPV

-1342.8

Requirement 3:
At what discount rate would you be indifferent between accepting the project and rejecting it? Enter CFs in cal hit
NPV enter numbers higher than 8 lower than 24 to see what percent the NPV first becomes negative

Discount rate

7.

%
19.28

Consider the following cash flows:

Year
0
1
2
3

Cash Flow
$ 32,000
14,200
17,500
11,600

Required:
What is the IRR of the above set of cash flows? Enter CFs in Calc hit IRR, CPT

Internal rate of return

%
17.32

12. Consider the following cash flows:

Year
0
1
2
3

Cash Flow
$-28,600
15,100
13,800
10,200

Requirement 1:
What is the profitability index for the above set of cash flows if the relevant discount rate is 11 percent?

Profitability index

1.12

PI= NPV+ Initial invest /Initial invest

divide by CF0

Enter all CFs cpt NPV at given rate add CF0

18. Kerron Company is presented with the following two mutually exclusive projects. The required return for both
projects is 16 percent.

Year
0
1
2
3
4

Project M
$139,000
64,600
82,600
73,600
59,600

Project N
$366,000
147,000
191,000
132,000
121,000

Required:
(a)
What is the IRR for each project?

IRR
%

Project M

35.92

Project N

23.55

(b)
What is the NPV for each project?

Project M
Project N

(c)

NPV
$
58143.8

$
54062.2

Which, if either, of the projects should the company accept?

Mutually Exclusive means both are competing against same funding always
Project M

choose higher NPV most reliable. If NPV is positive IRR> cost and has a PI > 1

=sunk costs
17. Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land
six years ago for $8.8 million in anticipation of using it as a warehouse and distribution site, but the company has
since decided to rent facilities elsewhere. The land would net $11.6 million if it were sold today. The company now
wants to build its new manufacturing plant on this land; the plant will cost $22.8 million to build, and the site
requires $1,030,000 worth of grading before it is suitable for construction.

Required:
What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

Cash flow

$
3543000

Relevant CFs:
Initial Investment= 22.8 million to build + grading 1,030,000 (costs occur in order to
start project) + 11.6 million it Nets Today

18. Winnebagel Corp. currently sells 28,700 motor homes per year at $76,500 each and 7,700 luxury motor coaches
per year at $118,500 each. The company wants to introduce a new portable camper to fill out its product line; it
hopes to sell 23,700 of these campers per year at $22,500 each. An independent consultant has determined that if
Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 3,300 units per
year and reduce the sales of its motor coaches by 920 units per year.

Required:
What is the amount to use as the annual sales figure when evaluating this project?

New Campers: 23,700 * $22,500 each= $533,250,000 (Add)

Boost Existing: 3,300 * 76,500 each =

$252,450,000 (Add)

Reduces Coaches: 920* $118,500=

-109,020,000

=676,680,000

(subtract)

Sales: $842,000
-

57% Var (479,940)

Deprec (99,500)
=
$ 74,700
Tax @ 40% (29,880)
NI = $44,820

19. A proposed new investment has projected sales of $842,000. Variable

costs are
57 percent
of sales, and fixed
- Fixed
Cost
(187,860)
costs are $187,860; depreciation is $99,500. Assume a tax rate of 40 percent.

Required:
What is the projected net income?
$

Net income

44820

20. Fill in the missing numbers in the following income statement:

Sales
-Costs
-Depreciation

= EBIT

645,100
-346,600
-97,300

201200

-Taxes (30%)

= Net income

60360

140840

Requirement 2:
What is the OCF? (Sales-Costs) * (1-tax %) + ($ Dep * tax %) =(201,200) * (0.7) + (97,300 * 30%)

OCF

$
238140

Requirement 3:
What is the depreciation tax shield? ($ Dep * tax %) = (97,300 * 30%)

Depreciation tax shield

$
29190

21. A piece of newly purchased industrial equipment costs $1,010,000 and is classified as seven-year property
under MACRS. The MACRS depreciation schedule is shown in MACRS Table.

Required:
Calculate the annual depreciation allowances and end-of-the-year book values for this equipment.

Beginning
Year
1

Beginning
Book Value
$

Depreciation
Allowance
$

Ending Book
Value
$

1010000

144329

865671

865671

247349

618322

618322

176649

441673

441673

126149

315524

315524

90193

225331

225331

90092

135239

135239

90193

45046

45046

45046

Dep Allowance CPT:

=1,010,000 * .
1429=144,329
=1,010,000 * .2449=
247,349

22. Consider an asset that costs $977,000 and is depreciated straight-line to zero over its ten-year tax life. The asset
is to be used in a seven-year project; at the end of the project, the asset can be sold for $135,200.

Required:
If the relevant tax rate is 40 percent, what is the aftertax cash flow from the sale of this asset?

Aftertax salvage value

$
198360

Selling for: $135,200

Current BV [ (977,000* (3 years left/10 years) ] = 293,100
Net (Gain/loss from sale) = BV- Selling =157,900
-

Tax on Net Gain/loss (Net * Tax)= 157 900 * 40% =63,160

= AFTSV: Selling + Taxes = 198,360

SL Dep = 977,000/10 yr life= $97,700/year

BV= Cost * (3 yrs left/10 yr life)= 977,000 * (3/10) = $293,100

Also:
=selling+ [ (BV-Selling) * Tax]
=135,200 + [ (293,100-135200) * 40%]
=135,200 + 63,160
=198,360

23. An asset used in a four-year project falls in the five-year MACRS class ( MACRS Table) for tax purposes. The
asset has an acquisition cost of $7,900,000 and will be sold for $1,830,000 at the end of the project.

Required:
If the tax rate is 34 percent, what is the aftertax salvage value of the asset?

1.
2.
3.
4.

Calc Dep= (add all dep % for yrs used (1-4) *cost
Calc Gain/loss= Salvg- current BV
CAlc Taxes= Gains*tax rate
ATSV= Salv- taxes owed (or +tax saved)

24. Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board
would sell for $27,200, and the company expects to sell 1,570 per year. The company currently sells 2,070 units of
its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,890 units per
year. The old board retails for $23,100. Variable costs are 57 percent of sales, depreciation on the equipment to
produce the new board will be $1,520,000 per year, and fixed costs are $1,420,000 per year.

Required:
If the tax rate is 35 percent, what is the annual OCF for the project?

(Sales-Costs)*(1-tax rate %) + (dep * tax %)

1. Calc relevant sales:
New: 1,570 * $27,200 = 42,704,000
-sales lost on old 180*23,100= -4,158,000
Sales = 38,546,000

(38,546,000- 57% VC-Ficxed Cost) * (1-.35) + (1,520,000*.34)

= (15,154,780 *.66) + 516,800
=10,002,154.80 + 516,800
=10,518,954.80

26. Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment
of $2,160,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it
will be worthless. The project is estimated to generate $2,170,000 in annual sales, with costs of $1,160,000. Assume
the tax rate is 40 percent and the required return on the project is 12 percent.

Required:
What is the projects NPV?

1. Calc OCF
2. Enter CFs in Calculator: CF0 = -2,160,000, CF1= 894,000for 3 years

27. Kolbys Korndogs is looking at a new sausage system with an installed cost of $506,000. This cost will be
depreciated straight-line to zero over the projects four-year life, at the end of which the sausage system can be
scrapped for $98,000. The sausage system will save the firm $186,000 per year in pretax operating costs, and the
system requires an initial investment in net working capital of $44,000.

Required:
If the tax rate is 40 percent and the discount rate is 9 percent, what is the NPV of this project?

NPV

1.
2.
3.
4.
5.

$
48308.6

Initial Cost
OCF
ATSV
Enter CFs OCF for 3 years, the last CF= OCF+AFTS+ reverting NWC
Cpt NPV

28. Your firm is contemplating the purchase of a new $672,000 computer-based order entry system. The system will
be depreciated straight-line to zero over its six-year life. It will be worth $55,000 at the end of that time. You will
save $175,000 before taxes per year in order processing costs, and you will be able to reduce working capital by
$50,000 at the beginning of the project. Working capital will revert back to normal at the end of the project.

Required:
If the tax rate is 35 percent, what is the IRR for this project? (Do not round intermediate calculations. Enter
your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

IRR

%
11.97

1.
2.
3.
4.

Initial Cost
OCF
ATSV
Enter CFs OCF for 5 years, the last
CF= OCF+AFTS- reverting NWC
5. Cpt IRR

29. Use the information below to answer the following questions.

Polish Zloty
Euro
Mexican Peso
Swiss Franc
Chilean Peso
New Zealand Dollar
Singapore Dollar

U.S. $ EQUIVALENT
.2977
1.2183
.0752
1.0163
.002071
.8086
.8010

CURRENCY PER U.S. $

3.3586
.8208
13.2989
.9840
482.80
1.2367
1.2485

Requirement 1:
If you have $200, how many Polish zlotys can you get?

=$200 US$ (Swiss rate/per US $) and the US$

cancel
Enter .2977 calculator hit 1/x multiply by 200 =
671.81

Amount
Requirement 2:
How much is one euro worth in U.S. dollars?

Chart says 1 Euro buys 1.2183 US $

Worth of one euro

Requirement 3:
If you have 5.90 million euros, how many dollars do you have?

5.90 million * 1.2183= $7,187,970

$

Amount

Requirement 4:
Which is worth more, a New Zealand dollar or a Singapore dollar?
New Zealand dollar

Requirement 5:
Which is worth more, a Mexican peso or a Chilean peso? =Swiss/ US $ * US $/Euro
Mexican peso

=1.0163/US $ * US$/1.2183 US $ Cancel

Requirement 6:

Enter 1.0163 hit 1/x and enter 1.2183 hit 1/x

=.98396*.8208
=1.1988

(a)
How many Swiss francs can you get for a euro?

SF/

Amount
(b) What do you call this rate?
Cross rate

30. Use the information below to answer the questions that follow.

U.K. Pound ()
Canada dollar

U.S. $ EQUIVALENT
1.5788
1.0151

CURRENCY PER U.S. $

.6334
.9851

Requirement 1:
Which would you rather have, $100 or 100?
100 Pounds

Requirement 2:
Which would you rather have, $100 Canadian or 100?
100 Pounds

Requirement 3:
(a)
What is the cross-rate for Canadian dollars in terms of British pounds?

Cross-rate

C$

/
1.5552

(b)
What is the cross-rate for British pounds in terms of Canadian dollars?

Cross-rate

/ C$
.6430

31. The Lo Tech Co. just issued a dividend of $2.50 per share on its common stock. The company is expected to
maintain a constant 5 percent growth rate in its dividends indefinitely.

Required:
If the stock sells for $44.30 a share, what is the companys cost of equity? (Do not round intermediate
calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Cost of equity