Q1. Net present value: Riggs Ltd is planning to spend $650,000 on a new marketing campaign.

It believes that this action will result in additional cash flows of $282,756 over the next three
years. If the discount rate is 17.5 percent, the NPV is $

Initial investment = $650,000

Annual cash flows = $282,756
Length of project = n = 3 years
Required rate of return = k = 17.5%
Net present value = NPV

NPV=$-30,253.36

Payback: Quebec Ltd is purchasing machinery at a cost of $3,604,639. The company expects, as
a result, cash flows of $1,027,697, $887,243, and $2,274,542 over the next three years. The
payback period is
Year Cash Flow Cumulative Cash Flow
0 $-3,604,639 $-3,604,639
1 1,027,697 -2,576,942
2 887,243 -1,689,699
3 2,274,542 584,843

PB = Years before cost recovery + (Remaining cost to recover/ Cash flow during the year)
= 2.74 years

Q3. Net present value: Briarcrest Condiments is a spice-making company. Recently, it developed
a new process for producing spices. This calls for acquiring machinery that would cost $2,172,381.
The machine will have a life of five years and will produce cash flows as shown in the table. If the
discount rate is 15.49%, the NPV of the project is $
YEAR CASH FLOW
1 $460,683
2 -254,089
3 833,782
4 999,814
5 697,748

Cost of equipment = $2,172,381

Length of project = n = 5 years
Required rate of return = k = 15.49%

NPV is -521,096.91
Q4. ekyll & Hyde Ltd is evaluating two mutually exclusive projects. Costs and cash flows are given
in the following table. If the cost of capital is 15 percent, Jekyll and Hyde Ltd should accept

YEAR PROJECT 1 PROJECT 2

0 $(1,250,000) $(1,250,000)
1 3,350,198 2,078,154
2 1,622,446 4,164,792
3 1,241,864 3,170,034
4 1,127,260 4,287,944
5 1,303,351 4,389,659
Project 1:
Cost of project = $1,250,000
Length of project = n = 5 years
Required rate of return = k = 15%

Project 2:
Cost of project = $1,250,000
Length of project = n = 5 years
Required rate of return = k = 15%

project 2 has the highest positive NPV and should be accepted.

Q5. Modified internal rate of return (MIRR): Morningside Bakeries has recently purchased
equipment at a cost of $684,690. The company expects to generate cash flows of $257,006 in
each of the next four years. If the cost of capital is 15.81 percent, the MIRR for this project is
PV of costs = $684,690
Length of project = n = 4 years
Cost of capital = k = 15.81%
Annual cash flows = CFt = $257,006

Now we can solve for the MIRR.

MIRR=17.35%

Q6. Payback: Nakamichi Bancorp has made an investment in banking software at a cost of
$1,680,563. The institution expects productivity gains and cost savings over the next several
years. If the company is expected to generate cash flows of $686,396, $699,154, $480,269, and
$326,059 over the next four years, the investments payback period is
Year Cash Flow Cumulative Cash Flow
0 $-1,680,563 $-1,680,563
1 686,396 -994,167
2 699,154 -295,013
3 480,269 185,256
4 326,059 511,315

PB = Years before cost recovery + (Remaining cost to recover/ Cash flow during the year)
= 2.61 years

Project B
Cumulative Cumulative
Year CF PVCF
CF PVCF
$-
0 $-1,411,880 $-1,411,880 $-1,411,880
1,411,880
1 $586,212 $-825,668 $542,789 $-869,091
2 $413,277 $-412,391 $354,318 $-514,773
3 $231,199 $-181,192 $183,533 $-331,240
Q7. Discounted payback: Timeline Manufacturing Ltd is evaluating two projects. The company
uses payback criteria of three years or less. Project A has a cost of $1,135,592, and Project Bs
cost will be $1,411,880. Cash flows from both projects are given in the following table. Assuming
an 8% discount rate and using the discounted payback period, Timeline should choose
PROJ
Cumulative Cumulative
ECTA CF PVCF
CF PVCF
Year
0 $-1,135,592 $-1,135,592 $-1,135,592 $-1,135,592
1 $86,212 $-1,049,380 $79,826 $-1,055,766
2 $313,562 $-735,818 $268,829 $-786,937
3 $427,594 $-308,224 $339,438 $-447,499
4 $285,552 $-22,672 $209,889 $-237,610

Since the companys acceptance criteria is three years, neither project will be accepted.

Q8. Net present value: Franklin Mints, a confectioner, is looking to purchase a new jellybean-
making machine at a cost of $312,500. The company projects that the cash flows from this
investment will be $127,830 for the next seven years. If the appropriate discount rate is 14
percent, the NPV for the project is $
Initial investment = $312,500
Annual cash flows = $127,830
Length of project = n = 7 years
Required rate of return = k = 14%

Q9. Computing terminal-year FCF: Five years ago, a pharmaceutical company bought a
machine that produces pain-reliever medicine at a cost of $2 million. The machine has been
depreciated over the past five years, and the current book value is $700,000. The company
decides to sell the machine now at its market price of $1 million. The marginal tax rate
is 39 percent.

1.What is the relevant cash flow for the machine project?

The relevant cash flows include the sale price of the machine, as well as the tax on the capital
gain:
1,000,000 0.39(1,000,000 700,000) = $883,000
2.What is the relevant cash flow if the market price of the machine is $600,000 instead?
When the market price of the machine is changed to $600,000, the relevant cash flows include the
sale price and tax saving on capital loss:
600,000 0.39(600,000 700,000) = $639,000
Q10. FCF and NPV for a project: Midland Ltd is considering buying a new farm that it plans to
operate for 10 years. The farm will require an initial investment of $12,500,000. The investment
will consist of $2,000,000 for land and $10,500,000 for trucks and other equipment. The land, all
trucks, and all other equipment are expected to be sold at the end of 10 years at a price of $5
million, $2 million above book value. The farm is expected to produce revenue of $1,700,000 each
year, and an after tax annual cash flow from operations of $1,518,100. The marginal tax rate is 35
percent, and the appropriate discount rate is 10.70 percent. NPV = $-1,890,029
.