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    Calculate net present value, internal rate of return and payback period.

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    Calculate the net present value of each of the following potential investments using a discount rate of 12%. Assuming that this discount rate is the threshold rate for capital investment projects in your firm, determine which should or should not be considered for the upcoming capital budget and why they should or should not be considered.

    1. A Plant Expansion:

    ? Initial cost $4,500,000
    ? Useful Life 20 Years
    ? Annual Sales 4,000 units
    ? Unit Costs $300
    ? Unit Selling Price $525

    2. A New Machine:

    ? Initial Cost $30,000
    ? Installation Cost $5,000
    ? Expected profit per unit produced $4
    ? Expected annual production 1800
    ? Life of Machine 6 Years

    Calculate the Internal Rate of Return of each of the following potential investments and recommend whether or not to include them in the upcoming capital budget given that the firm's cost of capital is 14.5%.

    3. New Software:

    ? Initial Cost $25,000
    ? Training Cost $12,000
    ? Annual Cost Savings $10,500
    ? Useful Life 6 Years

    4. Machine A or Machine B
    Note: The key word here is "or". One or the other machine must be bought. So, the analysis should be based on the incremental cash flows resulting from the more expensive alternative.

    ? Annual Production in units 40,000
    ? Cost of Machine A $38,000
    ? Cost of Machine B $32,000
    ? Unit Cost to Produce on Machine A $2.20
    ? Unit Cost to Produce on Machine B $2.22
    ? Useful Life 12 Years

    5.Compute NPV, IRR, and Payback Period for the following project. Assume a cost of capital of 16.5%. Sketch a cash flow diagram as part of the solution. Be prepared to recommend or reject this project and to justify your recommendation.

    Project Initial Capital Cost $100,000
    Project Life 5 Years
    Annual Revenue $32,000
    Annual Operating Cost $8,000
    Marginal Tax Rate 34%
    Depreciation Method Straight Line for Project Life

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    Solution Summary

    The expert calculates the net present value, internal rate of return and the payback period.