Janes, Inc. is considering the purchase of a machine that would cost $430,000 and would last for 6 years, at the end of which, the machine would have a salvage value of $47,000. The machine would reduce labor and other costs by $109,000 per year. Additional working capital of $4,000 would be needed immediately, all of which would be recovered at the end of 6 years. The company requires a minimum pretax return of 17% on all investment projects. (Ignore income taxes in this problem.)

Please refer attached file for better clarity of tables and formulas.

Solution

Cost of Machine=Po=$430,000.00
Salvage Value=S=$47,000.00
Savings in labor and other costs=OS=$109,000.00
Additional Capital required=W=$4,000.00
Cost of capital=17%

Let us summarize the problem.

Year End Cost of machine Cost savings Additiona working capital Salvage Value Net cash flow PV @17%
n Po OS WC S ...

Solution Summary

Solution calculates NPV and IRR in the given case.

Which of the following statements is incorrect?
a. Assuming a project has normal cash flows, theNPV will be positive if theIRR is less than the cost of capital.
b. If the multiple IRR problem does not exist, any independent project acceptable by theNPV method will also be acceptable by theIRR method.
c. If IRR = k

Theprojected cash flows for two mutually exclusive projects are as follows:
Year Project A Project B
0 ($150,000) ($150,000)
1 0 50,000
2 0 50,000
3 0 50,000
4 0 50,000
5 250,000

A project that costs 3,000 will provide annual cash flows of $800 for each of the next 6 years. Is this project worth pursuing if the discount rate is 10%? How high can the discount rate be before you reject theproject?

A. Calculate theNPVandIRRfor each project. The company's WACC is 10%.
b. Assume only one percent can be undertakeen. Which project would you recommend and why would you?

Your division is considering two projects with the following net cash flows:
year Project A Project B
0 (25) (20)
1 5 10
2 10 9
3 17 6
a) What are theprojects' NPVs,

1) What is the internal rate of return (IRR) for a project whose intitial after tax cost is $5,000,000 and it is expected to provide after tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3, and $2,300,000 in year 4 ?
2) A firm is evaluating a proposal that has an initial investment

Problem A: Try evaluating the following projects with all of the basic capital budgeting tools, in other words, which project would you pick as the best:
Projected
Cash Flow Years 0 1 2 3 4 5
Project A (500) 45 55 65 175 185
Project B (250

4. The budget committee has received the following projects. They are mutually exclusive. The Company uses 10% as the rate of return.
Year Project A Project B
0 - 30,000 - 60,000
1 10,000

Please help with the following problem:
Your company is considering investing in a new plant. The initial investment is $220 million, obtainable at the end of the plant's useful life in ten years. Your company uses straight line depreciation (seven years). The net income from theproject is expected to be $28 million per y

here are the cash flows for two mutually exclusive projects
Project C0 C1 C2 C3
A (20,000) 8,000 8,000 8,000
B (20,000) 0 0 25,000
a) at what interest rates would you prefer project A to B
b) what is theIRR of each of each projectthe response has to be in excel format