A company plans to acquire a piece corporate aircraft costing $5,000,000. The aircraft is expected to save the company $1,200,000 per year for each of its 5 year useful life. It will be depreciated straight line over 5 years. The firm's cost of capital is 12%. Its tax rate is 40%. It will replace another aircraft that was acquired 8 years ago at a cost of $3,000,000. The old aircraft was depreciated straight line over 5 years. The old aircraft will be sold for $500,000. what is the Net Present Value of the investment and the Internal Rate of Return?
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We need to find the cash flow every year and calculate NPV and IRR.
At present, the initial investment of the piece corporate aircraft is $5,000,000 minus the gain of selling the old aircraft. (Because the old aircraft was depreciated straight line over 5 years starting from 8 years ago. So the residual value is ...
Which of the following statements is incorrect?
a. Assuming a project has normal cash flows, the NPV will be positive if the IRR is less than the cost of capital.
b. If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method.
c. If IRR = k
A. Calculate the NPV and IRRfor 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?
Look at the net present value (NPV) equation (11-1) in your text Fundamentals of Financial Management and the cash flow time line below the formula. In your own words, explain each term of the NPV equation. Explain how you would arrive at the discounted cash flows for each year represented within the time line. How does this cal
) Threadnot, Inc.'s President wants to see the NPV and IRR of each of the above plans. The appropriate discount rate is 20%. Calculate each plan's NPV and IRR.
Year 0 1 2 3
Plan a $-8000 $8,000 $700 $700
plan b $-8000 $900 $900 $10000
(Ignore income taxes in this problem) Lett Corporation is investigating buying a small used aircraftfor the use of its executives. The aircraft would have a useful life of 7 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircra
The projected 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 the project?
Company K is considering two mutually exclusive projects. The cash flows of the projects are as follows:
Year Project A Project B
0 -$2,000 -$2,000
1 $500
2 $500
3
