Exam 16: Investment Decision Applications

A new venture that requires outlays of $127 000 for each of the first two years will yield net returns of $85 000 in each year for years 3 to 6 and $70 000 for each of the following four years. A residual value of $130 000 can be recovered at the end of the last income period. Should the venture be undertaken if a yield of 11.56% is required?

Saint Mary's is offered a contract, which offers a net present value of $15 000 if the required rate of return is 12%. Alternatively, net present value is -$12 000 if the required rate of return is 18%. At what rate of return, would the NPV be zero?

A special chemical development project requires an immediate outlay of $110 000 and $50 000 at the end of each year for 3 years. Net returns are nil for the first 3 years and $60 000 per year thereafter for fourteen years. What is the net present value of the project at 17%?

The introduction of a new product requires an immediate outlay of $145 000 and has a residual value of $30 000 after 10 years. The anticipated net returns from the marketing of the product are expected to be $25 500 per year for ten years. What is the rate of return on the investment (correct to the nearest tenth of a percent)? a)Use linear interpolation to find the approximate value of the rate of return. b)Find the answer using Cash Flow and IRR.

If Ontario decides to build two new units of nuclear power plants, the overnight cost of construction is $15 billion. The annual net rate of return from the two units is $1 billion every year for the next 60 years, at which time the plants should be decommissioned and have no residual value. Should Ontario decide to build the two units of nuclear power plants if the required rate of return is 7%?

A company is considering a project that will require a cost outlay of $30 000 per year for three years. At the end of the project, the company expects to salvage the physical assets for $50 000. The project is estimated to yield net returns of $60 000 in Year 4, $40 000 in Year 5, and $15 000 for each of the following five years. Alternative investments are available yielding a rate of return of 14.5%. Compute the net present value of the project.

A once in a lifetime project requires an immediate outlay of $100 000 and $25 000 at the end of each year for 3 years. Net returns are nil for the first 3 years and $30 000 per year thereafter for fourteen years. What is the net present value of the project at 16%?

LG expects a demand of 10 000 headphones per year for a special purpose headphone for six years. Net return per unit is $6.10. To produce the headphones, LG must buy equipment costing $200 000 with a life of six years and a salvage value of $10 000 after six years. The company estimates that repair costs will be $8000 per year during Years 2 to 6. Should LG invest in the equipment if it requires a return of 16% on its investment? Calculate the NPV.

A company is considering a project that will require a cost outlay of $17 200 per year for 3 years. At the end of the project the salvage value will be $15 000. The project will yield returns of $60 000 in Year 4 and $20 000 in Year 5. There are no returns after Year 5. Alternative investments are available that will yield a return of 14.2%. Should the company undertake the project?

Assume that the net present value of a project is $74.3 million at 6%, and -$21.2 million at 9%. Use linear interpolation to compute the rate of return correct to the nearest hundredth of a percent.

Jeremy has a number of outstanding credit cards debts. He seeks help from BDO to consolidate his debts and make it easy for him to make the debt payments. BDO offers him two alternatives. In the first alternative, the debt can be settled by making a payment of $30 000 now and a final payment of $42 000 in 3 years. Alternatively, the obligation can be settled by payments of $8400 at the end of every three months for three years. Which alternative is preferred and by how much if the interest is 13.5% compounded quarterly.

Pfizer is planning to embark on developing a new medicine for the cure of common cold. If undertaken, the project requires $10 million dollar on R&D, every year for 5 years. The medicine will be marketed in Year 6 and net returns are estimated to be $10 million for the next 5 years at the end of which Pfizer plans to sell the formula to its competitor for $1 million. If corporation requires a ROI of 15%, what is the NPV for the project?

Jasmine has two investment choices. Alternative 1 requires an immediate outlay of $150 000 and offers a return of $417 000 after seven years. Alternative 2 requires an immediate outlay of $180 000 in return for which $25 000 will be received at the end of every six months for the next seven years. Alternative 3 requires an immediate outlay of $200 000 in return for which $60 000 will be received at the end of every year for the next seven years. The required rate of return on investment is 6.3% compounded semi-annually. What is Jasmine's most preferred option?

Assume that the net present value of a project is $ 3870 at 10%, and -$1853 at 12%. Use linear interpolation to compute the rate of return correct to the nearest tenth of a percent.

Suppose you are offered two investment alternatives. If you choose Alternative 1, you will have to make an immediate outlay of $26 000. In return, you will receive $1500 at the end of every three months for the next ten years. If you choose Alternative 2, you will have to make an outlay of $14 000 now and $8000 in two years. In return, you will receive $60 000 ten years from now. Interest is 8.22% compounded semi-annually. Compute the net present value for each alternative and determine which investment should be accepted or rejected according to the net present value criterion.

Big Sky Company expects a demand of 30 000 units per year for a special purpose component for six years. Net return per unit is $4.10. To produce the component, the company must buy a machine costing $245 000 with a life of six years and a salvage value of $47 000 after six years. The company estimates that repair costs will be $18 000 per year during Years 2 to 6. If Big Sky company requires a return on investment of 15.5%, should it market the component?

A piece of property may be acquired by making an immediate payment of $125 000 and payments of $37 500 and $50 000 three and five years from now respectively. Alternatively, the property may be purchased by making quarterly payments of $11 150 in advance for five years. Which alternative is preferable if money is worth 12.2% compounded semi-annually?

Replacing old equipment at an immediate cost of $75 000 and an additional outlay of $10 000 six years from now will result in savings of $3120 per quarter for 11 years. The required rate of return is 8% compounded annually. Use the net present value method to determine whether the company should replace old equipment or not.

A restaurant may be purchased for $250 000. Annual net income from the operation of the restaurant is expected to be $61 000 for each of the first 4 years and $30 000 for each of the next three years. After 7 years, the restaurant can be sold for $315 000. Determine the rate of return on the investment correct to the nearest tenth of a percent. a)Use linear interpolation to find the approximate value of the rate of return. b)Find the answer using Cash Flow and IRR.

A commitment on the project requires an initial outlay of $10 000.00 and a further outlay of $5000.00 after one year. Net returns are $5 000.00 per year for five years. What is the net present value of the project at 16%?