Fin500 week 9 homework

Question

Problem 1

Suppose a company is considering two investment projects. Both projects require an upfront expenditure of \$30 million. The company estimates that the cost of capital is 10% and that the investments will result in the following after-tax cash flows (in millions of dollars). Complete parts (a) through (e) below.

 Year Project A Project B 1 \$28 \$10 2 \$20 \$15 3 \$10 \$20 4 \$5 \$25

a) Find the regular payback period for each project.

b) Find the discounted payback period for each project.

c) Assume that the two projects are independent and the cost of capital is 10%. Which project or projects should the company undertake? Base your results on the NPV and show the NPVs.

d) Assume that the two projects are mutually exclusive and the cost of capital is 5%. Which project or projects should the company undertake? Base your results on the MIRR and show the MIRRs.

e) Explain why quantitative measures may not always be the best way to evaluate a project.

Problem 2

A shellfish processing company is thinking about purchasing a new clam digger for \$14,000. The expected net cash flows resulting from the digger are \$9,000 in year 1, \$7,000 in the 2nd year, \$5,000 in the 3rd year, and \$3,000 in the 4th year. Should the company purchase this digger if its cost of capital is 12 percent? In providing your answer, you must present the NPV along with your decision to accept/reject.

Problem 3

What is the internal rate of return for a project that has a net investment of \$60,000 and the following net cash flows: Year 1 = \$15,000; Year 2 = \$20,000; Year 3 = \$25,000; Year 4 = \$30,000 (You may find Excel or a financial calculator useful to solve this problem)?