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Six Questions of Present value




Question;Question #1 Using payback to make capital investment;decisions;Robinson Hardware;is adding a new product line that will require an investment of $1,454,000.;Managers estimate that this investment will have a 10-year life and generate;net cash inflows of $300,000 the first year, $270,000 the second year, and;$260,000 each year thereafter for eight years. Compute the payback period. 5.4yrs;Question #2 Using ARR to make capital investment;decisions;Refer to the;Robinson Hardware information in Question #1. Assume the project has no;residual value. Compute the ARR for the investment. Round to two places. 16.45%;Question #3 Using the time value of money;Janice wants to;take the next five years off work to travel around the world. She estimates her;annual cash needs at $28,000 (if she needs more, she will work odd jobs).;Janice believes she can invest her savings at 8% until she depletes her funds. 2. 124,656;Requirements;1. How much money;does Janice need now to fund her travels?;2. After speaking;with a number of banks, Janice learns she will only be able to invest her funds;at 4%. How much does she need now to fund her travels?;Question #4 Using NPV and profitability index to make;capital investment decisions;Use the NPV method;to determine whether Kyler Products should invest in the following projects;Project A: Costs $260,000 and offers seven;annual net cash inflows of $57,000. Kyler Products requires an annual return of;16% on investments of this nature.;Project B: Costs $375,000 and offers 10 annual;net cash inflows of $75,000.;Kyler Products;demands an annual return of 14% on investments of this nature. 1. Project B $16,200 NPV;Requirements;1. What is the NPV;of each project? Assume neither project has a residual value. Round to two;decimal places.;2. What is the;maximum acceptable price to pay for each project?;3. What is the;profitability index of each project? Round to two decimal places.;Question #5 Using IRR to make capital investment;decisions;Refer to the data;regarding Kyler Products in question #4. Compute the IRR of each project and;use this information to identify the better investment.;Project A 12% ?;14% IRR;Question #6 Using payback, ARR, NPV, and IRR to make;capital investment decisions;Davis Consulting is considering purchasing two;different types of;servers. Server A;will generate net cash inflows of $25,000 per year and have a zero residual;value. Server A?s estimated useful life is three years and it costs $40,000. Server;B will generate net cash inflows of $25,000 in year 1, $11,000 in year 2, and;$4,000 in year 3. Server B has a $4,000 residual value and an estimated life of;three years. Server B also costs $40,000. Davis?s required rate of return is;14%.;Requirements;1. Calculate;payback, accounting rate of return, net present value, and internal rate of;return for both server investments. Use Microsoft Excel to calculate NPV and;IRR.;2. Assuming;capital rationing applies, which server should Davis invest in?


Paper#37464 | Written in 18-Jul-2015

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