Fin 486
1
NPV—Mutually exclusive projects Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration.
The relevant cash flows associated with each are shown in the following table. The firm’s cost of capital is 15%.
a. Calculate the net present value (NPV) of each press.
b. Using NPV, evaluate the acceptability of each press.
c. Rank the presses from best to worst using NPV.
PERSONAL FINANCE PROBLEM
P9–11 Long-term investment decision, NPV method Jenny Jenks has researched the financial pros and cons of entering into an elite MBA program at her state university.
The tuition and needed books for a master’s program will have an upfront cost of $100,000. On average, a person with an MBA degree earns an extra $20,000 per year over a business career of 40 years. Jenny feels that her opportunity cost of capital is 6%. Given her estimates, find the net present value (NPV) of entering this
MBA program. Are the benefits of further education worth the associated costs?
P9–12 Payback and NPV Neil Corporation has three projects under consideration. The cash flows for each project are shown in the following table. The firm has a 16% cost of capital.
a. Calculate each project’s payback period. Which project is preferred according to this method?
Project A Project B Project C
Initial investment (CF0) $40,000 $40,000 $40,000
Year (t) Cash inflows (CFt)
1 $13,000 $ 7,000 $19,000
2 13,000 10,000 16,000
3 13,000 13,000 13,000
4 13,000 16,000 10,000
5 13,000 19,000 7,000
LG
3
LG
2
LG
3
Press A Press B Press C
Initial investment (CF0) $85,000 $60,000 $130,000
Year (t) Cash inflows (CFt)
1 $18,000 $12,000 $50,000
2 18,000 14,000 30,000
3 18,000 16,000 20,000
4 18,000 18,000 20,000
5 18,000 20,000 20,000
6 18,000 25,000 30,000
7 18,000 — 40,000
8 18,000 — 50,000
LG
3
CHAPTER 9 Capital Budgeting Techniques 447
ISBN: 0-558-02009-7
Principles
NPV—Mutually exclusive projects Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration.
The relevant cash flows associated with each are shown in the following table. The firm’s cost of capital is 15%.
a. Calculate the net present value (NPV) of each press.
b. Using NPV, evaluate the acceptability of each press.
c. Rank the presses from best to worst using NPV.
PERSONAL FINANCE PROBLEM
P9–11 Long-term investment decision, NPV method Jenny Jenks has researched the financial pros and cons of entering into an elite MBA program at her state university.
The tuition and needed books for a master’s program will have an upfront cost of $100,000. On average, a person with an MBA degree earns an extra $20,000 per year over a business career of 40 years. Jenny feels that her opportunity cost of capital is 6%. Given her estimates, find the net present value (NPV) of entering this
MBA program. Are the benefits of further education worth the associated costs?
P9–12 Payback and NPV Neil Corporation has three projects under consideration. The cash flows for each project are shown in the following table. The firm has a 16% cost of capital.
a. Calculate each project’s payback period. Which project is preferred according to this method?
Project A Project B Project C
Initial investment (CF0) $40,000 $40,000 $40,000
Year (t) Cash inflows (CFt)
1 $13,000 $ 7,000 $19,000
2 13,000 10,000 16,000
3 13,000 13,000 13,000
4 13,000 16,000 10,000
5 13,000 19,000 7,000
LG
3
LG
2
LG
3
Press A Press B Press C
Initial investment (CF0) $85,000 $60,000 $130,000
Year (t) Cash inflows (CFt)
1 $18,000 $12,000 $50,000
2 18,000 14,000 30,000
3 18,000 16,000 20,000
4 18,000 18,000 20,000
5 18,000 20,000 20,000
6 18,000 25,000 30,000
7 18,000 — 40,000
8 18,000 — 50,000
LG
3
CHAPTER 9 Capital Budgeting Techniques 447
ISBN: 0-558-02009-7
Principles