Exam 16: Investment Decision Applications

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).

A commitment on the project requires an initial outlay of $10 000.00 and a further outlay of $5 000.00 after one year. Net returns are $5 000.00 per year for five years. What is the net present value of the project at 16%?

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 $50000 now and $2000 at the end of every six months for 5 years. If interest is 8%, which offer is preferable?

A company is planning on investing the following monies. They spend Today -$26000, Year 1 -$7000, Year 4 -$11000, and Year 7 -$10100. Their cash inflows are Years 1-3 inclusive +$12000, Years 4-9 inclusive +$16000. What is their IRR?

A new venture that requires outlays of $127 000 for each of the first two years will yield net returns of $85 000 in each year for years 3 to 6 and $70 000 for each of the following four years. A residual value of $130 000 can be recovered at the end of the last income period. Should the venture be undertaken if a yield of 11.56% is required?

A company has the following pattern of cash flows. Today -$47000, Year 1 -$15500, Year 2 +$16000, Year 3 +$35000, Year 4 +$57000. What is the IRR?

An obligation can be settled by making a payment of $7500.00 now and a final payment of $10 000.00 in five years. Alternatively the obligation can be settled by payments of $750.00 at the end of every three months for five years. If interest rate is 10% compounded quarterly, determine the preferred alternative.

A car costs $29 700. Alternatively, the car can be leased for three years by making payments of $540 at the beginning of each month and can be bought at the end of the lease for $14750. If interest is 9.2% compounded semi-annually, which alternative is preferable?

A company is considering a project that will require a cost outlay of $17 200 per year for 3 years. At the end of the project the salvage value will be $15 000. The project will yield returns of $60 000 in Year 4 and $20 000 in Year 5. There are no returns after Year 5. Alternative investments are available that will yield a return of 14.2%. Should the company undertake the project?

Billy Bob wants to convert his farm into a ski resort. He asked you to determine his rate of return based on the following estimates. - Development cost for each of the first 2 years, $87 000. - Construction of a chalet in Year 3, $1240 000. - Upon his retirement in fifteen years, improvements in the property will yield him $270 000. - Net returns from the operation of the golf course will be nil for the first three years and $200 000 per year afterwards until his retirement.

Big Sky Company expects a demand of 30 000 units per year for a special purpose component for six years. Net return per unit is $4.10. To produce the component, the company must buy a machine costing $245 000 with a life of six years and a salvage value of $47 000 after six years. The company estimates that repair costs will be $18 000 per year during Years 2 to 6. If Big Sky company requires a return on investment of 15.5%, should it market the component?

A restaurant may be purchased for $250 000. Annual net income from the operation of the restaurant is expected to be $61 000 for each of the first 4 years and $30 000 for each of the next three years. After 7 years, the restaurant can be sold for $315 000. Determine the rate of return on the investment correct to the nearest tenth of a percent. a) Use linear interpolation to find the approximate value of the rate of return. b) Find the answer using Cash Flow and IRR.

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?

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 $8 000 per year during Years 2 to 6. Should LD invest in the equipment if it requires a return of 16% on its investment?

A company has an immediate cash outlay of -$325000 and additional subsequent cash outlays of -$6000 per year for the life of the project. They will receive cash inflows in year 3 for +$77000 and increasing by $3000 per year until the project ends 7 years later (total of 10 years). What is the IRR?

Donna and Keith want to sell their business. They have received two offers. If they accept Offer A they will receive $61 000 immediately and $20 000 in three years. If the accept Offer B they will receive $37000 now and $3000 at the end of every six months for 5 years. If interest is 6.67%, which offer is preferable?