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