Exam 16: Investment Decision Applications

Saint Mary's is offered a contract, which requires an immediate investment of $25 million. The estimated returns are $5 million per year for 20 years. Compute the rate of return.

An expenditure may be met by outlays of $1700 now and $2210 at the end of every six months for 6 years or by making monthly payments of $500 in advance for seven years. Interest is 11% compounded annually. Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

A project requiring an immediate investment of $150 000 and a further outlay of $60 000 after four years has a residual value of $50 000 after nine years. The project yields a negative net return of $10 000 in Year 1, a zero net return in Year 2, $60 000 per year for the following four years, and $70 000 per year for the last three years. Find the rate of return (correct to the nearest tenth of a percent).

Replacing old equipment at an immediate cost of $5000 and $7000 six years from now will result in a savings of $3000 semi-annually for ten years. At 11% compounded annually, should the old equipment be replaced?

Project A requires an immediate investment of $18 000 and another $16 000 in three years. Net returns are $4500 after two years, $13 000 after four years, and $8900 after six years. Project B requires an immediate investment of $4000, another $6000 after two years, and $4000 after four years. Net returns are $3375 per year for 8 years. Determine the net present value at 11%. Which project is preferable according to the net present value criterion?

A selection has to be made between two investment alternatives. The first alternative offers a net return of $47 000.00 after three years, $30 000.00 after five years and $26 000.00 after seven years. The second alternative provides a net return of $13 000.00 per year for seven years. Determine the preferred alternative according to the discounted cash flow criterion if money is worth 11%.

Replacing old equipment at an immediate cost of $75 000 and an additional outlay of $10 000 six years from now will result in savings of $3120 per quarter for 11 years. The required rate of return is 11.4% compounded annually. Use the net present value method to determine whether the company should replace old equipment or not.

LD Winery expects a demand of 10 000 bottles per year for a special purpose wine for six years. Net return per unit is $6.10. To produce the wine, LD must buy equipment costing $200 000 with a life of six years and a salvage value of $10 000 after six years. The company estimates that repair costs will be $8000 per year during Years 2 to 6. Should LD invest in the equipment if it requires a return of 16% on its investment?

The Radium Hot Springs plans to install a swimming pool. Construction of the lift is estimated to require an immediate outlay of $420 000. The life of the pool is estimated to be 20 years with a salvage value of $20 000. Cost of preparing the area is expected to be $30 000 for each of the first 2 years of operation. Net cash inflows from the pool are expected to be $49 000 for each of the first five years and $90 000 for each of the following 15 years. Find the rate of return (correct to the nearest tenth of a percent).

Replacing old office equipment at an immediate cost of $3000 and $4000 four years from now will result in savings of $400 semi-annually for ten years. Should the old equipment be replaced a)at 8% compounded annually? b)at 12% compounded annually?

A contract is estimated to yield net returns of $7000.00 quarterly for seven years. To secure the contract, an immediate outlay of $80 000.00 and a further outlay of $60 000.00 three years from now are required. If interest is 6% compounded quarterly, determine if the investment should be accepted or rejected.

A new car costs $21 000. Alternatively, the car can be leased for three years by making payments of $360 at the beginning of each month and can be bought at the end of the lease for $10 000. If interest is 8% compounded semi-annually, which alternative is preferable?

CGI Inc. is developing a new software platform, which requires an immediate investment of $780 000 and another $260 000 in three years. Net returns expected are $450 000 after two years, $313 000 after four years, and $889 000 after six years. However, if they simply upgrade their current platform, it requires an immediate investment of $400 000, another $260 000 after two years, and $340 000 after four years. Net returns are $187 500 per year for 8 years. Determine the net present value at 5.9%. Which project is preferable according to the net present value criterion?

A company is looking to invest in a very risky project. They have a required rate of return of 27% compounded annually. The project has the following cash inflows: Year 1 $17500, Year 2 $15000, Year 3 $27500. It also has the following cash outflows: Immediately -$10 000, Year 1 -$15 000, Year 3 -$9500. What is the NPV?

An expenditure may be met by outlays of $3000 now and $1000 at the end of every six months for 5 years or by making monthly payments of $250 in advance for three years. Interest is 12% compounded annually. Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

A firm invests $200 000 in machinery that yields net after-tax cash flows of $90 000 at the end of each of the next three years. The opportunity cost of capital is 12%. What is the net present value of the project (to the nearest thousand dollars)?

A local community church is contemplating installment of solar cells on its roof and sell the access electricity to the Ontario grid via a power purchase agreement. The project requires an initial investment of $75 000 with a residual value of $2000 after 10 years. It is estimated to yield annual net returns of $15 000 for 10 years. What is the NPV of the project given a rate of return of 7%?

A company has cash outflows of $21 275 starting today for each of the next 5 years. After that they will have cash inflows of $16 000 for each of the following 7 years. The discount rate is 9% compounded annually. What is the NPV?

A company has the following pattern of cash flows. Today -$47 000, Year 1 -$15 500, Year 2 + $16 000, Year 3 + $35 000, Year 4 + $57 000. What is the IRR?

Sean and Jessica want to sell their interest in a small business. They have received two offers. If they accept Offer A they will receive $40 000 immediately and $30 000 in two years. If the accept Offer B they will receive $50 000 now and $2000 at the end of every six months for 5 years. If interest is 8%, which offer is preferable?