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    Net Present Value, Payback, IRR and Tme value of money

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    1. Heritage Corp is considering a new machine that will cost $1,000,000. Net cash inflows expected are $125,000 per year for 20 years.
    a. Determine (Simple) Payback

    b. Determine Internal Rate of Return

    c. Assuming cost of funds is 8%, determine Net Present Value (NPV) of project, as well as profitability (Benefits to Cost) ratio.

    d. Determine NPV payback if cost of funds is 8%

    e. What is annualized NPV if cost of funds is 8%?

    2. Bridgett is trying to determine the highest current value sales price for her car. She has 3 offers:
    Mark has offered her $5,000 today
    Paul has offered her $6,000 4 years from today as a lump sum payment.
    Kris offered $1,200 a year for each of the next 5 years.

    You are to assume that based on risk, the appropriate interest rate would be 10%

    Which party should Bridgett sell to?

    What about if rates drop to 6% (hint, redo the calculations, and compare)

    3. Rank the following projects according to 1. Payback 2. NPV and 3. IRR
    Project A Project B Project C
    Cost $1,000,000 $500,000 $100,000
    Annual Cash flow $100,000 $100,000 $25,000
    Cash flow for 20 yrs 8 yrs 8 yrs

    You are to assume an interest rate (for NPV purposes) of 8%

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    Answers to 3 questions on Net Present Value, Payback, IRR and Tme value of money.

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