Exam 16: Investment Decision Applications

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?

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Question 1

Correct Answer:

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Inflows: PMT = $10 000(6.10)= $61 000; P/Y = C/Y = 1; I/Y = 16%; n = 6 PV_IN = 61000 = 224 769 PV_OUT= 200 000 + 8 000 - 10 000 ( ) NPV = 224 769 - 222 090 = $2679 ^{Since NPV > 0,the return on the investment is greater than 16%.LD Winery should invest in the equipment.}

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?

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Question 2

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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 8% compounded annually.Use the net present value method to determine whether the company should replace old equipment or not.

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Question 3

Correct Answer:

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Outlays: FV = 10 000; I/Y = 8%; P/Y = C/Y = 1; n = 6(1)= 6 PV = 10 000 = $6301.70 PV_OUT= 75 000 + 6301.70 = $81 302 Inflows: PMT = $3120; P/Y = 4; C/Y = 1; c = = 0.25; n = 11(4)= 44; p = - 1 = .0194265; PV_IN = 3120 = 91 724.25 = 91 724 NPV = 91 724 - 81 302 = $10 422 Since NPV > 0,the old equipment should be replaced.

The SHREK Company has to make a decision about expanding its production facilities.Research indicates that the desired expansion would require an immediate outlay of $160 000 and an outlay of a further $60 000 in five years.Net returns are estimated to be $25 000 per year for the first five years and $20 000 per year for the following 9 years.Find the net present value of the project.Should the expansion project be undertaken if the required rate of return is 10% compounded annually?

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Question 4

A company has the following net cash inflows.Today -$7000,Year 1 -$15 000,Year 2 -$9000,Year 3 + $12 000,Year 4 -$3000,Year 5 + $19 000.Compute the net present value if the required rate of return is 7.22% compounded annually.

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Question 5

A company needs to spend $15 000 for each of the next three years.Net returns beginning in Year 4 are estimated at $2500 per year for ten years.The required rate of return is 9.75% compounded annually.The NPV is?

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Question 6

A company buys equipment for $15 000 today and has annual net cash inflows of $6000 for 3 years.The discount rate is 12% compounded annually.What is the Net Present Value (NPV)?

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Question 7

Nick has a choice to pay $1499 for a TV now or pay $1599 3 years from now.What should be the minimum interest rate at which Nick should invest $1499 to make a decision to pay 3 years from now?

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Question 8

A telephone system with a disposable value of $4200 after five years can be purchased for $16 600.Alternatively,a leasing agreement is available that requires an immediate payment of $1900 plus payments of $150.00 at the beginning of each month for five years.If money is worth 9.6% compounded monthly,should the telephone system be leased or purchased?

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Question 9

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 $14 750.If interest is 9.2% compounded semi-annually,which alternative is preferable?

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Question 10

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,$1 240 000. - 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.

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Question 11

Assume that the net present value of a project is $ 3870 at 10%,and -$1853 at 12%.Use linear interpolation to compute the rate of return correct to the nearest tenth of a percent.

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Question 12

A commitment on the project requires an initial outlay of $10 000.00 and a further outlay of $5000.00 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%?

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Question 13

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?

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Question 14

If Ontario decides to build two new units of nuclear power plants,the overnight cost of construction is $15 billion.The annual net rate of return from the two units is $1 billion every year for the next 60 years,at which time the plants should be decommissioned and have no residual value.Should Ontario decide to build the two units of nuclear power plants if the required rate of return is 7%?

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Question 15

The introduction of a new product requires an initial outlay of $610 000.The anticipated net returns from the marketing of the product are expected to be $92 300 per year for 12 years.Find the rate of return (correct to the nearest tenth of a percent).

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Question 16

A project requires an initial outlay of $350 000 and a further outlay of $100 000 after one year.Net returns are $105 000 per year for five years.What is the net present value of the project at 9.9%?

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Question 17

Assume that the net present value of a project is $ 220 at 22%,and -$305 at 24%.Use linear interpolation to compute the rate of return correct to the nearest tenth of a percent.

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Question 18

A once in a lifetime project requires an immediate outlay of $100 000 and $25 000 at the end of each year for 3 years.Net returns are nil for the first 3 years and $30 000 per year thereafter for fourteen years.What is the net present value of the project at 16%?

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Question 19

Saint Mary's is offered a contract,which offers a net present value of $15 000 if the required rate of return is 12%.Alternatively,net present value is -$12 000 if the required rate of return is 18%.At what rate of return,would the NPV be zero?

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Question 20

Showing 1 - 20 of 67

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 net cash inflows.Today -$7000,Year 1 -$15 000,Year 2 -$9000,Year 3 + $12 000,Year 4 -$3000,Year 5 + $19 000.Compute the net present value if the required rate of return is 7.22% compounded annually.

A company needs to spend $15 000 for each of the next three years.Net returns beginning in Year 4 are estimated at $2500 per year for ten years.The required rate of return is 9.75% compounded annually.The NPV is?

A company buys equipment for $15 000 today and has annual net cash inflows of $6000 for 3 years.The discount rate is 12% compounded annually.What is the Net Present Value (NPV)?

Nick has a choice to pay $1499 for a TV now or pay $1599 3 years from now.What should be the minimum interest rate at which Nick should invest $1499 to make a decision to pay 3 years from now?

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 $14 750.If interest is 9.2% compounded semi-annually,which alternative is preferable?

Assume that the net present value of a project is $ 3870 at 10%,and -$1853 at 12%.Use linear interpolation to compute 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 $5000.00 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%?

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?

The introduction of a new product requires an initial outlay of $610 000.The anticipated net returns from the marketing of the product are expected to be $92 300 per year for 12 years.Find the rate of return (correct to the nearest tenth of a percent).

A project requires an initial outlay of $350 000 and a further outlay of $100 000 after one year.Net returns are $105 000 per year for five years.What is the net present value of the project at 9.9%?

Assume that the net present value of a project is $ 220 at 22%,and -$305 at 24%.Use linear interpolation to compute the rate of return correct to the nearest tenth of a percent.

A once in a lifetime project requires an immediate outlay of $100 000 and $25 000 at the end of each year for 3 years.Net returns are nil for the first 3 years and $30 000 per year thereafter for fourteen years.What is the net present value of the project at 16%?

Saint Mary's is offered a contract,which offers a net present value of $15 000 if the required rate of return is 12%.Alternatively,net present value is -$12 000 if the required rate of return is 18%.At what rate of return,would the NPV be zero?

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