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Required Return, Profitability Index, and NPV

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Chapter 7 Practice Problems 16 & 25

16. IRR. Marielle Machinery Works forecasts the following cash flows on a project under consideration. It uses internal rate of return rule to accept or reject projects. Should this project be accepted if the required return is 12 percent?

C0 C1 C2 C3
-\$10,000 0 +\$7,500 + \$8,500

25. Profitability Index versus NPV Consider these two projects

Project Co C1 C2 C3
A -\$36 +\$20 +\$20 +\$20
B -50 +25 +25 +25

a. Which project has the higher NPV if the discount rate is 10 percent?

b. Which has the higher profitability index?

c. Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment project? Which project is the most attractive to a firm that is limited in the funds it can raise?

23. Project Evaluation

Kinky Copies may buy a high-volume copier. The machine costs \$100.000 and will be depreciated straight line over 5 years to a salvage value of \$20,000. Kinky anticipates that the machine actually can be sold in 5 years for \$30,000. The machine will save \$20,000 a year in labor costs but will require an increase in working capital, mainly paper supplies of \$10,000. The firms marginal tax rate is 35 percent, and the discount rate is 8 percent. Should Kinky buy the machine?

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