Exam 16: Investment Decision Applications

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?

An investment of $180 000 yields annual net returns of $27 700 for seven years.What is the rate of return on the investment (correct to the nearest tenth of a percent)if part of the initial investment,in the amount of,$80 000 is recovered at the end of 7 years? a)Use linear interpolation to find the approximate value of the rate of return. b)Find the answer using Cash Flow and IRR.

A company is planning on investing the following monies.They spend Today -$26 000,Year 1 -$7000,Year 4 -$11 000,and Year 7 -$10 100.Their cash inflows are Years 1-3 inclusive + $12 000,Years 4-9 inclusive + $16 000.What is their IRR?

What is the IRR for the following net annual cash flows today -$45 000,Year 1 + $12 000,Year 2 + $37 000,Year 3 + $12 000,Year 4 + $17 000?

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.

Pfizer is planning to embark on developing a new medicine for the cure of common cold.If undertaken,the project requires $10 million dollar on R&D,every year for 5 years.The medicine will be marketed in Year 6 and net returns are estimated to be $10 million for the next 5 years at the end of which Pfizer plans to sell the formula to its competitor for $1 million.If corporation requires a ROI of 15%,what is the NPV for the project?

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 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?

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?

A company spends $117 500 today and has positive cash inflows of $34 000 for each of the next 6 years.What is the Internal Rate of Return (IRR)?

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 company is considering a project that will require a cost outlay of $25 000 per year for 3 years.At the end of the project the salvage value will be $15 000.The project will yield annual net returns of $17 500 for 5 years.Alternative investments are available that will yield a return of 15%.Should the company undertake the project?

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.

You win a lottery and have a choice of taking $200 000.00 immediately or taking payments of $8000.00 at the end of every three months for ten years.Which offer is preferable if interest is 8% compounded quarterly?

The owner of a music store is considering remodelling the store in order to carry a larger inventory.The cost of remodelling and additional inventory is $43 200.The expected increase in net profit is $7000 per year for the next 3 years and $10 000 each year for the following 7 years.After ten years,the owner plans to retire and sell the business.She expects to recover the additional $40 000 invested in inventory but not the $43 200 invested in remodeling.Compute the rate of return.

Tamia Industries plans to replace the outdated equipment that will cost the company $100 000.00 now and $60 000.00 six years from now.This replacement will result in revenues of $6000.00 at the end of each quarter for twelve years.At an interest rate of 9% compounded annually and using the Net Present Value criterion,should the company replace this equipment or not?

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 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?

Molly needs to decide whether to buy a water heater for $2200 cash and enter a service contract requiring a payment of $30 at the end of every 3 months for 10 years or to enter a 10 years lease requiring a payment of $90 at the beginning of every 3 months.If the leased water heater can be bought after 10 years for $80,should Molly buy or lease the water heater,if money is compounded quarterly at 2.5%?

A company has an immediate cash outlay of -$325 000 and additional subsequent cash outlays of -$6000 per year for the life of the project.They will receive cash inflows in year 3 for + $77 000 and increasing by $3000 per year until the project ends 7 years later (total of 10 years).What is the IRR?