Exam 16: Investment Decision Applications

A project requiring an immediate investment of $150 000 and a further outlay of $60 000 after four years has a residual value of $50 000 after nine years.The project yields a negative net return of $10 000 in Year 1,a zero net return in Year 2,$60 000 per year for the following four years,and $70 000 per year for the last three years.Find the rate of return (correct to the nearest tenth of a percent).

A company has two investment choices.Alternative A requires an immediate outlay of $4000.00 and offers a return of $14 000.00 after seven years.Alternative B requires an immediate outlay of $3600.00 in return for which $500.00 will be received at the end of every six months for the next seven years.If the rate of return is 6% compounded semi-annually,determine which alternative is preferable.

An expenditure may be met by outlays of $3000 now and $1000 at the end of every six months for 5 years or by making monthly payments of $250 in advance for three years.Interest is 12% compounded annually. Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

A firm invests $200 000 in machinery that yields net after-tax cash flows of $90 000 at the end of each of the next three years.The opportunity cost of capital is 12%.What is the net present value of the project (to the nearest thousand dollars)?

An obligation can be settled by making a payment of $12 000 now and a final payment of $32 000 in 4 years.Alternatively,the obligation can be settled by payments of $2700 at the end of every three months for five years.Interest is 10% compounded quarterly. Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

A selection has to be made between two investment alternatives.The first alternative offers a net return of $47 000.00 after three years,$30 000.00 after five years and $26 000.00 after seven years.The second alternative provides a net return of $13 000.00 per year for seven years.Determine the preferred alternative according to the discounted cash flow criterion if money is worth 11%.

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?