Net present value and other investment criteria solutions

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 ...