Exam 8: Net Present Value and Capital Budgeting

Marshall's & Co. purchased a corner lot in Montreal five years ago at a cost of $640,000. The lot was recently appraised at $810,000. At the time of the purchase, the company spent $50,000 to grade the lot and another $4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1.2 million. What amount should be used as the initial cash flow for this building project?

The Equivalent Annual Cost method allows comparison of the costs of equipment with unequal lives. If Quick-roll machine has an eleven year life, and an NPV of $2,100, while the Zip-roller machine has a seven year life and an NPV of $2,000. Which machine would you choose if the business is expected to continue and the discount rate for both is 14%?

What is the inflation rate given a nominal interest rate is 13% when the real rate is 6%?

If the inflation rate was positive the expected NPV of an investment would be:

Interest expense is typically excluded in the project cash flow because:

When is it appropriate to use the equivalent annual cost (EAC) methodology, and how do you make a decision using it?

What is the nominal rate of interest given a real rate of interest of 5% and an inflation rate of 7%?

You are considering whether to replace an existing flow meter. The existing meter can be sold now for $50 or it can be sold in 1 year for $10. It costs $30 per year to operate and maintain. A new meter costs $400 and has a 10-year life. It could be sold for $40 at the end of its life. The new meter costs $14 per year to operate and maintain. What do you recommend if the cost of capital is 12%? A._12,10 - $40/(1.12)¹⁰ = $471.87; $4 71.87/5.65 = $83.51 Because the cost of keeping the old machine is less than the cost of the new machine, the old machine should not be replaced.