Chapter910Worksheet1.xlsx

Chap 9 #1

Chapter 9 – Assignment 1.4

Problem 1: Calculating Payback 5 Points

Siva, Inc., imposes a payback cutoff of three years for its international investment projects. The company has two international projects with the following projected cash flows:

Year Cash Flow (A) Cash Flow (B)

0 $ (52,000) $ (55,000)

1 $ 17,000 $ 14,000

2 $ 19,000 $ 16,000

3 $ 17,000 $ 22,000

4 $ 11,000 $ 285,000

a) What is the precise payback period (in decimal form) for these two projects? b) Using payback period rules, should it accept either of them?

Create your Original Solution Below – Be sure to show all calculations and clearly indicate answers.

This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 9 #2

Chapter 9 – Assignment 1.4

Problem 2: Calculating Discounted Payback 5 Points

An investment project has annual cash inflows of $3,700, $4,800, $6,300, and $5,400, for the next four years, respectively. The discount rate is 12 percent.

a) What is the discounted payback period if the initial cost is $6,200? b) What is the discounted payback period if the initial cost is $9,600? c) What is the discounted payback period if the initial cost is $11,800?

Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.

Input area:

Annual cash inflows:

Year 1

Year 2

Year 3

Year 4

Discount rate

Initial cost

Initial cost

Initial cost

Output area:

.

Discounted payments:

Year 1 $ – 0

Year 2 $ – 0

Year 3 $ – 0

Year 4 $ – 0

Payback period – 0

Payback period – 0

Payback period – 0

This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 9 #3

Chapter 9 – Assignment 1.4

Problem 3: Calculating AAR 5 Points

You’re trying to determine whether to expand your business by building a new manufacturing line. The automated assembly line has an installation cost of $25 million, which will be depreciated straight-line to zero over its five-year life. The line has projected net income of $1,754,000, $1,820,500, $1,716,300, $1,352,000, and $1,097,400 over these five years.

a) What is the project’s average accounting return (AAR)? b) If the company’s required return is 15%, should it pursue the project?

Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.

Input area:

Installation cost ($)

# of years

Projected net income ($):

Year 0

Year 1

Year 2

Year 3

Year 4

Acceptance Criteria (%)

.

Output area:

.

Average net income ERROR:#DIV/0!

Average book value ERROR:#DIV/0!

AAR ERROR:#DIV/0!

Decision ERROR:#DIV/0!

This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 9 #4

Chapter 9 – Assignment 1.4

Problem 4: Calculating IRR 5 Points

A firm evaluates all of its projects by applying the IRR rule. The firm’s required rate of return for its projects is 15 percent. A proposed project is expected to have the following cash flows:

Year Cash Flow

0 $ (250,000)

1 $ 85,000

2 $ 130,000

3 $ 110,000

a) What is the IRR for this project? b) Should the firm accept this project?

Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.

Input area:

Required Return

Annual cash flows:

Year 0

Year 1

Year 2

Year 3

.

Output area:

.

IRR ERROR:#NUM!

Accept/Reject ERROR:#NUM!

This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 9 #5

Chapter 9 – Assignment 1.4

Problem 5: Calculating NPV 5 Points

A firm evaluates all of its projects by applying the NPV decision rule. A proposed project is expected to have the following cash flows:

Year Cash Flow

0 $ (250,000)

1 $ 85,000

2 $ 130,000

3 $ 110,000

a) At a required return of 12 percent, what is the project’s NPV? Should the firm accept this project? b) At a required return of 18 percent, what is the project’s NPV? Should the firm accept this project?

Create your Original Solution Below – Be sure to show all calculations and clearly indicate answers.

This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 9 #6

Chapter 9 – Assignment 1.4

Problem 6: Problems with Profitability Index 10 Points

The Sloan Corporation is trying to choose between the following two mutually-exclusive design projects:

Year Cash Flow (A) Cash Flow (B)

0 $ (76,500) $ (21,600)

1 $ 37,200 $ 11,700

2 $ 37,200 $ 11,700

3 $ 37,200 $ 11,700

a) Calculate the profitability index for both projects if the required return is 12 percent. Based on the profitability index decision rule, which project should the firm accept? b) Calculate the NPV for both projects if the required return is 12 percent. Based on the NPV decision rule, which project should the firm accept? c) Explain why your answers for (a) and (b) are different?

Create your Original Solution Below – Be sure to show all calculations and clearly indicate answers.

This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 10 #1

Chapter 10 – Assignment 1.4

Problem 1: Calculating Depreciation 5 Points

A piece of newly-purchased industrial equipment costs $1,240,000 and is classified as seven-year property under MACRS. Depreciation on this equipment will impact the company’s taxes, and will therefore be a significant factor in determing whether the company should proceed with the purchase.

a) Calculate the annual depreciation under MACRS for all eight years depreciation is allowed. b) Calculate the end-of-year book values for this equipment, using MACRS, for all eight years.

Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.

Input area:

Purchase Price ($)

*7-year property under MACRS

Output area:

.

Yr. Beginning Book Value MACRS Depreciation Ending Book value

1 $ – 0 0.1429 $ – 0 $ – 0

2 – 0 0.2449 – 0 – 0

3 – 0 0.1749 – 0 – 0

4 – 0 0.1249 – 0 – 0

5 – 0 0.0893 – 0 – 0

6 – 0 0.0892 – 0 – 0

7 – 0 0.0893 – 0 – 0

8 – 0 0.0446 – 0 – 0

This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 10 #2

Chapter 10 – Assignment 1.4

Problem 2: Calculating Project OCF 10 Points

Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 million. The fixed asset will be depreciated straight-line to zero over its three-year life, after which time it will be worthless (zero salvage value). The project is estimated to generate $2,190,000 in annual sales, with costs of $815,000. The applicable tax rate is 35 percent, and the required rate of return on the project is 12 percent.

a) What is the Operating Cash Flow (OCF) for this project? b) What is the project’s Net Present Value (NPV)?

Create your Original Solution Below – Be sure to show all calculations and clearly indicate answers.

This is the Student Template, provided in the course materials by D. Kendall April 2020

Chap 10 #3

Chapter 10 – Assignment 1.4

Problem 3: Comparing Mutually-Exclusive Projects 10 Points

Lang Industrial Systems Company (LISC) is trying to decide between two different conveyer belt systems. System A costs $290,000, has a four-year life, and requires $80,000 in pretax annual operating costs. System B costs $375,000, has a six-year life, and requires $74,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever project is chosen, it will not be replaced when it wears out. The applicable tax rate is 34 percent and the discount rate is 8 percent.

a) Calculate the OCF and NPV for each project. b) Which project should the firm choose?

Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.

Input area:

System A:

Cost

Pretax annual operating cost

Life

System B:

Cost

Pretax annual operating cost

Life

Both:

Tax rate

Discount rate

*Depreciation staight-line

Output area:

.

System A:

OCF ERROR:#DIV/0!

NPV ERROR:#DIV/0!

System B:

OCF ERROR:#DIV/0!

NPV ERROR:#DIV/0!

If the system will not be replaced

when it wears out, then ERROR:#DIV/0!

should be chosen, because it has the more

positive NPV.

This is the Student Template, provided in the course materials by D. Kendall April 2020