Exam 10: Capital Budgeting: Decision Criteria and Real Option Considerations

Red Lake Mines, Inc. is considering adoption of a new project requiring a net investment of $10 million. The project is expected to generate 5 years of net cash inflows of $5 million per year. In the project's sixth, and final year, it is expected to have a net cash outflow of $1 million. What is the project's net present value, using a discount rate of 12 percent?

Axa is replacing an old, fully depreciated extractor with a more efficient machine that will cost $265,000. The new extractor will be depreciated as a 7-year MACRS asset. With the more efficient production, Axa expects annual revenues to increase by $80,000, and annual operating expenses to increase by $25,000. If Axa expects to sell the machine at the beginning of year 6 for $40,000, determine the NPV of this project. Assume the firm's marginal tax rate is 40% and that the firm's cost of capital is 10%. Use the depreciation schedule listed below: (7-Yr Dep. Schedule: 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, 4.46%)

There are various reasons why companies may have difficulty in earning a positive net present value. These reasons include barriers to market entry and other factors. List these factors.

What is the internal rate of return for a project that has a net investment of $76,000 and net cash flows of $20,507 per year for 7 years?

When a project has multiple internal rates of return:

Based upon the following cash flows, should Ooey Gooey Candy Makers introduce a new product, Skinny Minnie Diet Cuisine? The initial investment is $780,000 and the cost of capital is 12.2%.