Aerospace dynamics will invest $110 000

13. Aerospace Dynamics will invest $110,000 in a project that will produce the following cash flows. The cost of capital is 11 percent. Should the project be undertaken? (Note that the fourth year’s cash flow is negative.)

Year

Cash Flow

1................

$36,000

2................

44,000

3................

38,000

4................

(44,000)

5................

81,000

14. The Horizon Company will invest $60,000 in a temporary project that will generate the following cash inflows for the next three years.

Year

Cash Flow

1................

$15,000

2................

25,000

3................

40,000

The firm will also be required to spend $10,000 to close down the project at the end of the three years. If the cost of capital is 10 percent, should the investment be undertaken?

15. Skyline Corp. will invest $130,000 in a project that will not begin to produce returns until after the 3rd year. From the end of the 3rd year until the end of the 12th year (10 periods), the annual cash flow will be $34,000. If the cost of capital is 12 percent, should this project be undertaken?

16. The Ogden Corporation makes an investment of $25,000, which yields the following
cash flows:

Year

Cash Flow

1................

$ 5,000

2................

5,000

3................

8,000

4................

9,000

5................

10,000

a. What is the present value with a 9 percent discount rate (cost of capital)?

b. What is the internal rate of return? Use the interpolation procedure shown in this chapter.

c. In this problem would you make the same decision in parts a and b

17. The Danforth Tire Company is considering the purchase of a new machine that would increase the speed of manufacturing and save money. The net cost of this machine is $66,000. The annual cash flows have the following projections.

Year

Cash Flow

1................

$21,000

2................

29,000

3................

36,000

4................

16,000

5................

8,000

a. If the cost of capital is 10 percent, what is the net present value?

b. What is the internal rate of return?

c. Should the project be accepted? Why?

18. You are asked to evaluate two projects for Adventures Club, Inc. Using the net present value method combined with the profitability index approach described in footnote 2 on page ____, which project would you select? Use a discount rate of 12 percent.

Project X (trips to Disneyland) ($10,000 investment)

Project Y (international film festivals) ($22,000 investment)

Year

Cash Flow

Year

Cash Flow

1..............................

$4,000

1.................................

$10,800

2..............................

5,000

2.................................

9,600

3..............................

4,200

3.................................

6,000

4..............................

3,600

4.................................

7,000

19. Cablevision, Inc., will invest $48,000 in a project. The firm’s discount rate (cost of capital) is 9 percent. The investment will provide the following inflows.

1................

$10,000

2................

10,000

3................

16,000

4................

19,000

5................

20,000

The internal rate of return is 15 percent.

a. If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years? (Assume the inflows come at the end of each year.)

b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years?

c. Generally is one investment assumption likely to be better than another?

20. The 21st Century Corporation uses the modified internal rate of return. The firm has a cost of capital of 8 percent. The project being analyzed is as follows ($20,000 investment):

Year

Cash Flow

1................

$10,000

2................

9,000

3................

6,800