Exam 16: Investment Decision Applications

Molly needs to decide whether to buy a water heater for $2200 cash and enter a service contract requiring a payment of $30 at the end of every 3 months for 10 years or to enter a 10 years lease requiring a payment of $90 at the beginning of every 3 months. If the leased water heater can be bought after 10 years for $80, should Molly buy or lease the water heater, if money is compounded quarterly at 2.5%?

A project requires an initial outlay of $350 000 and a further outlay of $100 000 after one year. Net returns are $105 000 per year for five years. What is the net present value of the project at 9.9%?

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.

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?

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.

A company has cash outflows of $21 275 starting today for each of the next 5 years. After that they will have cash inflows of $16 000 for each of the following 7 years. The discount rate is 9% compounded annually. What is the NPV?

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%?

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.

The SHREK Company has to make a decision about expanding its production facilities. Research indicates that the desired expansion would require an immediate outlay of $160 000 and an outlay of a further $60 000 in five years. Net returns are estimated to be $25 000 per year for the first five years and $20 000 per year for the following 9 years. Find the net present value of the project. Should the expansion project be undertaken if the required rate of return is 10% compounded annually?

A wireless telephone system with a disposable value of $5 000 after five years can be purchased for $15 000. Alternatively, a leasing agreement is available that requires an immediate payment of $2000 plus payments of $100.00 at the beginning of each month for five years. If money is worth 6% compounded monthly, should the telephone system be leased or purchased?

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 6.58% compounded semi-annually. What is Jasmine's most preferred option?

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 selection has to be made between two investment alternatives. The first alternative offers a net return of $47 000.00 after three years, $30 000.00 after five years and $26 000.00 after seven years. The second alternative provides a net return of $13 000.00 per year for seven years. Determine the preferred alternative according to the discounted cash flow criterion if money is worth 11%.

Nick has a choice to pay $1499 for a TV now or pay $1599 3 years from now. What should be the minimum interest rate at which Nick should invest $1499 to make a decision to pay 3 years from now?

The Radium Hot Springs plans to install a swimming pool. Construction of the lift is estimated to require an immediate outlay of $420 000. The life of the pool is estimated to be 20 years with a salvage value of $20 000. Cost of preparing the area is expected to be $30 000 for each of the first 2 years of operation. Net cash inflows from the pool are expected to be $49 000 for each of the first five years and $90 000 for each of the following 15 years. Find the rate of return (correct to the nearest tenth of a percent).

A company is considering a project that will require a cost outlay of $25 000 per year for 3 years. At the end of the project the salvage value will be $15 000. The project will yield annual net returns of $17 500 for 5 years. Alternative investments are available that will yield a return of 15%. Should the company undertake 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 7.4% compounded semi-annually. What is Jasmine's most preferred option?

Simion Inc is considering to build a new office in Clagary, which requires an immediate investment of $78 million and another $35 million in one year. Being near to the customers, it is expected a revenue of $2 million in Year one, $10 million in year 2 and then a steady stream of $15 million revenue each year in the subsequent 12 years. However, if they simply expand their current offices in Toronto and build a satellite office in Calgary, it requires an immediate investment of $30 million, another $15 million after one year, and $10 million after two years. Net returns are $expected to be $10 million per year from year 2 to year 14. Determine the net present value at 7.4%. Which option is preferable according to the net present value criterion?

A car costs $29 700. Alternatively, the car can be leased for three years by making payments of $540 at the beginning of each month and can be bought at the end of the lease for $14 750. If interest is 9.2% compounded semi-annually, which alternative is preferable?