1. A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project's NVP? (Hint begin by constructing a time line.)
2. Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows:
|
Year
|
Project A
|
Project B
|
|
1
|
$ 5,000,000
|
$20,000,000
|
|
2
|
$10,000,000
|
$10,000,000
|
|
3
|
$20,000,000
|
$6,000,000
|
3. Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial &5 million investment in net operating working capital. The company's tax rate is 40%.
a. What is the initial investment outlay?
b. The company spent and expensed $150,000 on research related to the new product last year. Would this change your answer? Explain.
c. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer?
4. The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:
Projected sales $18 million
Operating Costs (not including depreciation) $ 9 million
Depreciation $ 4 million
Interest expense $ 3 million
The company faces a 40% tax rate. What is the project's operating cash flow for the first year (t=1)?
5. Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $12 million, of which 75% has been depreciated. The used equipment can be sold today for $4 million, and its tax rate is 40%. What is the equipment's after-tax net salvage value?
References:
Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: Theory & practice (15th ed.). Boston, MA: Cenage Learning.