Practice Capital Investment Analysis(2) PDF

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Capital Investment Analysis Practice Problems 1.

Assume a project investment of $5,000 and the project provides annual cash flows of $2,500 for each of three years. At a discount rate of 8%, should the project be accepted? NPV = $1,442.74 – Project should be accepted since it is positive. IRR = 23.38%

2.

Assume a project has the following cash flows: Year Today Year 1 Year 2 Year 3 Year 4 Year 5

Cash Flow -200,000 -25,000 30,000 50,000 75,000 100,000

Find the net present value assuming the discount rate is 7%. NPV = ($27,830.67) – Project should not be accepted since it is negative. IRR = 3.32% 3.

A project costs $500,000 today. It will provide annual cash flows of $40,000 for the first five years (years 1-5) and $50,000 for the following ten years (years 615). The discount rate use should be 8%. Find the project’s NPV? NPV = ($111,953.17) - Project should not be accepted since it is negative. IRR = 4.31%

4.

For Problems 1, 2 and 3 above, find the IRR and payback periods of the projects whose cash flows were given above. Problem 1.

IRR = 23.38% Payback period = 2 years

Problem 2.

IRR =3.32% Payback period = 4.7 years

Problem 3.

IRR = 4.31% Payback period = 11.0 years

5.

For the following cash flows, find the NPV and IRR for a project. Use a 12.5% discount rate for the NPV. Year

Investment ($000) 2015 $ 18,546 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Projected Cash Inflow ($000) $44,550 $54,256 $62,025 $68,000 $74,555 $78,562 $82,365 $86,879 $90,125 $96,526

Projected Cash Outflow ($000) $52,250 $54,892 $58,000 $61,258 $66,598 $71,964 $77,125 $83,124 $88,654 $92,000

NPV = ($5,522.50) at 12.5% IRR = 7.56% 6.

Tyson Foods is considering the acquisition of a popular foods company. They estimate the following proforma cash flows for the next 15 years. After-tax hurdle rate for Tyson Foods is 6%. Find the NPV and IRR for this acquisition. Should Tyson continue to pursue the acquisition based on the data estimates?

NPV = ($ 3,952.70 million) IRR = 3.4% No, Tyson should not pursue unless the future cash flow estimates change.

7.

What is the payback period for the following set of cash flows? Year 0 1 2 3 4 2.32 years

Cash Flows -$6,700 2,800 3,200 2,200 1,400 (which is 2 + 700/2200 years)

8.

An investment project provides cash inflows of $935 per year for 8 years. What is the project payback period if: 3.32 years a) the initial cost is $3,100? b) the initial cost is $4,300? 4.60 years c) the initial cost is $7,900? No payback (beyond 8 years)

9.

Sunlight Appliances evaluates all of its projects by applying the IRR rule. If their hurdle rate 11.0%, should the firm accept the following project? Year 0 1 2 3

Cash Flows -$168,500 86,000 91,000 53,000

IRR = 18.79% which is greater than hurdle rate of 11.0%. Therefore, accept project. You can also calculate the NPV of DCF to answer the question. NPV at 11.0% equals $21,588.26 10.

A project that provides annual cash flows of $2,145 for 8 years requires and investment of $8,450 today. Is this an acceptable project if the required rate of return (hurdle rate) is 8%? What if its 24%? At what discount rate would you be indifferent between accepting or rejecting the project (where NPV = 0)? a) At 8%, NPV = $3,876.54 therefore, acceptable b) At 24%, NPV = -$1,111,48 therefore, unacceptable c) IRR = 19.13% (the discount rate that would make the NPV = 0)

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