Question 1: NPV and IRR. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years. Is this project worth pursuing if the discount rate is 10 percent? How high can the discount rate be before you would reject the project?
Question 2: Project Evaluation. Revenues generated by a new fad product are forecast as follows:
Year Revenues
1 $40,000
2 30,000
3 20,000
4 10,000
Thereafter 0
Expenses are expected to be 40 percent of revenues, and working capital required in each year is expected to be 20 percent of revenues in the follow
1. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 40 percent, what are the project cash flows in each year?
2. If the opportunity cost of capital is 12 percent, what is project NPV?
3. What is project IRR?
What is the initial investment in the product? Remember working capital.ing year. The product requires an immediate investment of $45,000 in plant and equipment.
Question 3: Proper Cash Flows. Quick Computing currently sells 10 million computer chips each year at a price of $20 per chip. It is about to introduce a new chip, and it forecasts annual sales of 12 million of these improved chips at a price of $25 eachHowever, demand for the old chip will decrease, and sales of the old chip are expected to fall to 3 million per year. The oldchip costs $6 each to manufacture, and the new ones will cost $8 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip?
Question 14: Scenario Analysis. Consider the following scenario analysis:
Rate of Return
Scenario Probability Stocks Bonds
Recession .20 -5% +14%
Normal economy .60 +15 +8
Boom .20 +25 +4
1. Is it reasonable to assume that Treasury bonds will provide higher returns in recessions than in booms?
2. Calculate the expected rate of return and standard deviation for each investment.
3. Which investment would you prefer?