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# Simple Finance Problems

Please provide step-by-step solutions so I can know how to do it.

Problem One:
a. A project requires a net investment of \$100,000. At the firm's cost of capital of 10%, the project's profitability index is 1.15. Determine the net present value of the project.
b. Using the profitability index, which of the following projects should be accepted?
Project A: NPV = \$60,000, NINV = \$200,000
Project B: NPV = \$10,000, NINV = \$30,000
Project C: NPV = \$2,000, NINV = \$5,000
c. Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to \$40,000 per year; cash expenses are estimated to be \$29,000 per year. The cost of the project equipment is \$23,000, and the equipment's estimated salvage value at the end of the project is \$9,000. The equipment's \$23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a \$7,000 working capital investment in year 0 and another \$5,000 in year 5. The company's marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project.

Problem Two:
Troy McClain is considering investing in two assets - A and B. The initial outlay, annual cash flows, and annual depreciation for each asset is shown in the table below for assets' assumed five-year lives. As can be seen, Troy will use straight-line depreciation over each asset's five-year life. The firm requires a 12% return on each of those equally risky assets. Troy's maximum payback period is 2.5 years; its maximum discounted payback period is 3.25 years and its minimum accounting rate of return is 30%.

Asset A Asset B
Initial Outlay (CF0) \$200,000 \$180,000
Year (t) Cash Flow (CFt) Depreciation Cash Flow (CFt) Depreciation
1 \$ 70,000 \$40,000 \$ 80,000 \$36,000
2 80,000 40,000 90,000 36,000
3 90,000 40,000 30,000 36,000
4 90,000 40,000 40,000 36,000
5 100,000 40,000 40,000 36,000

(a). Calculate the accounting rate of return from each asset, assess its acceptability, and indicate which asset is best using the accounting rate of return.
(b). Calculate the payback period for each asset, assess its acceptability, and indicate which asset is best using the payback period.
(c). Calculate discounted payback for each asset, assess its acceptability, and indicate which asset is best using the discounted payback.
(d). Compute and contrast your findings in parts a, b, and c. Which asset would you recommend to Troy, assuming that they are mutually exclusive? Why?

Problem Three:
Brilliant Company is considering replacing a machine. The replacement will cut operating expenses by \$24,000 per year for each of the five years that the new machine is expected to last. Although the old machine has a zero book value, it has a remaining useful life of five years. The depreciable value of the new machine is \$72,000. Brilliant Company will depreciate the machine under MACRS using a five-year recovery method, and is subject to a 40 percent tax rate on ordinary income. Estimate the incremental operating cash flows attributable to the replacement. Be sure to consider the depreciation in year 6.

#### Solution Summary

This solution provides assistance with the sample finance problems attached.

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