Net present value and other investment criteria solutions

Net present value investing criteria finance sheet questions
Subject
Question Description
This assignment covers material in Chapter 9, specifically problems concerning net present value and other investment criteria.

10 questions
Use an Excel sheet to work out your problems and record your solutions
Submit an Excel sheet
Essentials of Finance Week 5 Assignment 1. Project with an initial cash outlay of $20,000 with following free cash flows for 5 years. Year 1 2 3 4 5 a. b. c. d. Free Cash Flows $8,000 $4,000 $3,000 $5,000 $10,000 How much is the payback period (Approach 1)? If the firm has a 10% required rate of return, how much is NPV (Approach 2)? If the firm has a 10% required rate of return, how much is IRR (Approach 3)? If the firm has a 10% required rate of return, how much is PI (Approach 4)? 2. Project with an initial cash outlay of $60,000 with following free cash flows for 5 years. The firm has a 15% required rate of return. Year 1 2 3 4 5 Free Cash Flows $25,000 $24,000 $13,000 $12,000 $11,000 Calculate: a. Payback period b. NPV c. IRR d. PI Analyze your results. FIN 500: Essentials of Finance, Week 5 Assignment Page 1 of 3 3. Mutually Exclusive Projects a. Consider the following cash flows for one-year Project A and B, with required rates of return of 10%. You have limited capital and can invest in only one project. Which one? Initial Outlay Inflow Project A $200 $300 Project B $1,500 $1,900 b. Example: Consider two projects, A and B, with initial outlay of $1,000, cost of capital of 10%, and the following cash flows in Years 1, 2, and 3. Which project should you choose if they are mutually exclusive? Independent? Crossover rate? Year 1 Year 2 Year 3 Project A $100 $200 $2,000 Project B $650 $650 $650 4. Calculate NPV • WACC (required rate of return, or discount rate): 9% Year Year 0 Year 1 Year 2 Cash Flows –$1,000 $500 $500 Year 3 $500 5. Find IRR Year Cash Flows Year 0 –$1,000 Year 1 $425 Year 2 $425 Year 3 $425 6. Find payback period Year Year 0 Cash Flows –$1,150 Year 1 $500 Year 2 $500 Year 3 $500 Year 2 $410 Year 3 $410 7. Find the changes in NPV due to increase in WACC • Old WACC: 10.00% • New WACC: 11.25% Year Year 0 Year 1 Cash Flows –$1,000 $410 FIN 500: Essentials of Finance, Week 5 Assignment Page 2 of 3 8. Find MIRR • WACC: 10% Year Year 0 Cash Flows –$1,000 Year 1 $450 Year 2 $450 Year 3 $450 9. Find discounted payback period • WACC: 10% Year Year 0 Cash Flows –$900 Year 1 $500 Year 2 $500 Year 3 $500 10. Find the crossover rate with the following information • WACC: 10.25% Year Year 0 Year 1 Year 2 CFS –$2,025 $750 $760 CFL –$4,300 $1,500 $1,518 FIN 500: Essentials of Finance, Week 5 Assignment Year 3 $770 $1,536 Year 4 $780 $1,554 Page 3 of 3 ...