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Fin 5263

Chapter 9 Homework Name_____________________

1. MartinCrane expects cash flows from a new project of $25,000 per year for the next 5 years. The project will require an investment of $40,000. Determine the NPV of the project if the required rate of return on such projects is 10%. Calculate the IRR.

2. Calculate the NPV of a project that has an initial investment of $65,000 and has one cash flow occurring 8 years from now of $250,000. Use a discount rate of 15%. Should you invest in the project? Calculate the PI.

3. A new project requires an initial investment of $45,000. Annual net cash flows of $15,000 are expected. Calculate the payback period.

4. Brian Industries has a project expecting to generate the following cash flows: $15,000 in the first 3 years of the project and $20,000 in the fourth year. Additionally, the project requires land reclamation at end of the project in year 5 of $25,000 (cash outlay). The project requires an initial investment of $10,000. Using a discount rate of 8%, what is the NPV of the project? Calculate the PI.

5. Calculate the NPV of a project that requires an initial cash outlay of $500,000 and generates annual net cash flows of $50,000 for 10 years. Use a discount rate of 12%. Calculate the IRR.

6. Clark Coop just spent $250,000 on a project generating the following cash flows: $75,000 in year 1, $50,000 in years 2 – 4, and $140,000 in year 5. Use a discount rate of 8% and compute the project NPV. Compute the IRR for the project.

7. Now assume that Clark Coop projects the cash flows will occur in the reverse: $140,000 in year 1, $50,000 in years 2-4, and $75,000 in year 5. Use a discount rate of 8% and compute the project NPV. Compute the IRR for the project as well.

8. If the NPV for Project A is $40,000 and the IRR is 12%, the NPV for Project B is $35,000 but has an IRR of 15%, which project should be chosen? The projects are mutually exclusive.

9. Calculate the IRR of a project generating the following cash flows: $40,000 in years 2-4 and $50,000 in years 6-7. The project requires an initial investment of $175,000. Should they invest in the project if they require a return of 10%.

1. The ___________________is the discount rate that should be employed to

calculate the present value of a proposed investment project's expected cash flow.

a. cost of capital

b. required rate of return

c. hurdle rate

d. all of the above