Principals Finance Assignments

Topics: Net present value, Rate of return, Investment, Cash flow, Time value of money, Internal rate of return / Pages: 7 (1300 words) / Published: Jun 22nd, 2015
Chap 22: 1, 2, 3, 4, 7, 10, and 11

1. You purchase machinery for $23,958 that generates cash flow of $6,000 for 5 years. What is the internal rate of return on the investment?

$23,958/$6000= 3.993
PVAIF (5 @ 3.993) = 8%

2. The cost of capital for a firm is 10%. The firm has 2 possible investments with the cash flows:
Yr 1 A. $300 B. $200
Yr 2 A. $200 B. $200
Yr 3 A. $100 B. $200

A. Each investment costs $480. What investments should the firm make according to the present value? PVIF: Yr1 .909, Yr2 .826, Yr3 .751 A. $300(.909) + 200(.826) + 100(.751) = $513 $513 ‑ 480 = $33

B. $200(.909) + 200(.826) + 200(.751) = $497 $497 ‑ 480 = $17

Both investments have a positive net present value, so both would be a good investment.

B. What is the internal rate of return for the 2 investments? Which investment should the firm make? Is the answer the same as A? Using 14% as the interest rate with PVAIF A. $300(.877) + 200(.770) + 100(.675) = $484.60 B. $480/200 = 2.4 PVAIF (3yrs @ 2.4) = 12% Both internal rates of return exceed 10%, so both would be a good investment. Same answer as A.

C. If the cost of capital rises to 14%, which investments should the firm make? A. $300(.877) + 200(.770) + 100(.675) = $484.60 $484.60 - $480 = $4.60 B. B. $200(.877) + 200(.770) + 200(.675) = $464.40 $464.40 – 480 = -$15.60

Investment A still yields a positive present value, so that would be the investment to choose.

3. A firm has the following investment alternatives:
Each investment costs $3,000, investments B & C are mutually exclusive, and the firm’s cost of capital is 8%.
Yr 1 A. $1,100 B. $3,600 C.
Yr 2 A. 1,100 B. C.
Yr 3 A. 1,100 B. C. $4,562

A. What is the net present value of ea investment? PVIF Yr1 .926, Yr2 .857, Yr3 .794 A. $1,100(.926) + 1,100(.857) + 1,100(.794) = $2,834.70 $2834.70 – 3,000 =

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