Question 1. Heritage Corp is considering a new machine that will cost $1,000,000. Net cash inflows expected are $125,000 per year for 20 years.
a. Determine (Simple) Payback
b. Determine Internal Rate of Return
c. Assuming cost of funds is 8%, determine Net Present Value (NPV) of project, as well as profitability (Benefits to Cost) ratio.
d. Determine NPV payback if cost of funds is 8%
e. What is annualized NPV if cost of funds is 8%?
Question 2. Bridgett is trying to determine the highest current value sales price for her car. She has 3 offers:
Mark has offered her $5,000 today
Paul has offered her $6,000 4 years from today as a lump sum payment.
Kris offered $1,200 a year for each of the next 5 years.
You are to assume that based on risk, the appropriate interest rate would be 10%
Which party should Bridgett sell to?
What about if rates drop to 6% (hint, redo the calculations, and compare)
Question 3. Rank the following projects according to 1. Payback 2. NPV and 3. IRR
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Project A |
Project B
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Project C
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Cost
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$1,000,000
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$500,000
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$100,000
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Annual Cash flow
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$100,000
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$100,000
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$25,000
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Cash flow for
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20 yrs
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8 yrs
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8 yrs
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You are to assume an interest rate (for NPV purposes) of 8%