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?

What is the IRR for the following net annual cash flows today -$45 000, Year 1 + $12 000, Year 2 + $37 000, Year 3 + $12 000, Year 4 + $17 000?

The owner of a music store is considering remodelling the store in order to carry a larger inventory. The cost of remodelling and additional inventory is $43 200. The expected increase in net profit is $7000 per year for the next 3 years and $10 000 each year for the following 7 years. After ten years, the owner plans to retire and sell the business. She expects to recover the additional $40 000 invested in inventory but not the $43 200 invested in remodeling. Compute the rate of return.

A company is planning on investing the following monies. They spend Today -$26 000, Year 1 -$7000, Year 4 -$11 000, and Year 7 -$10 100. Their cash inflows are Years 1-3 inclusive + $12 000, Years 4-9 inclusive + $16 000. What is their IRR?

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 if the interest is 8.5% compounded quarterly.

A new car costs $21 000. Alternatively, the car can be leased for three years by making payments of $360 at the beginning of each month and can be bought at the end of the lease for $10 000. If interest is 8% compounded semi-annually, which alternative is preferable?

A company needs to spend $15 000 for each of the next three years. Net returns beginning in Year 4 are estimated at $2500 per year for ten years. The required rate of return is 9.75% compounded annually. The NPV is?

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.

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.

Saint Mary's is offered a contract, which requires an immediate investment of $25 million. The estimated returns are $5 million per year for 20 years. Compute the rate of return.

An investment project requires an initial expenditure of $160 000.00 with a salvage value of $30 000.00 after ten years. It is estimated that it will have annual returns of $21 000.00 for ten years. Should the company undertake this project if it wants to achieve a 9% rate of return?

A company buys equipment for $15 000 today and has annual net cash inflows of $6000 for 3 years. The discount rate is 12% compounded annually. What is the Net Present Value (NPV)?

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?

Suleiman must make a choice between two investment alternatives. Alternative 1 will provide him returns of $300 000 at the end of second year and $700 000 at the end of fifth year. Alternative 2 will provide him returns $180 000 at the end of each of the next six years. Alternative 3 will provide him returns $370 000 at the end of second, fourth and sixth years. Which alternative is preferable if money is worth 5.5556%?

A company has the following pattern of cash flows. Today -$47 000, Year 1 -$15 500, Year 2 + $16 000, Year 3 + $35 000, Year 4 + $57 000. What is the IRR?

A telephone system with a disposable value of $4200 after five years can be purchased for $16 600. Alternatively, a leasing agreement is available that requires an immediate payment of $1900 plus payments of $150.00 at the beginning of each month for five years. If money is worth 9.6% compounded monthly, should the telephone system be leased or purchased?

Replacing old equipment at an immediate cost of $5000 and $7000 six years from now will result in a savings of $3000 semi-annually for ten years. At 11% compounded annually, should the old equipment be replaced?

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%?

A project requiring an immediate investment of $150 000 and a further outlay of $60 000 after four years has a residual value of $50 000 after nine years. The project yields a negative net return of $10 000 in Year 1, a zero net return in Year 2, $60 000 per year for the following four years, and $70 000 per year for the last three years. Find the rate of return (correct to the nearest tenth of a percent).

Project A requires an immediate investment of $18 000 and another $16 000 in three years. Net returns are $4500 after two years, $13 000 after four years, and $8900 after six years. Project B requires an immediate investment of $4000, another $6000 after two years, and $4000 after four years. Net returns are $3375 per year for 8 years. Determine the net present value at 11%. Which project is preferable according to the net present value criterion?