# NPV Problems

1) The Heritage Amusement Park would like to construct a new ride called the Sonic Boom, which the park management feels would be very popular. The ride would cost $450,000 to construct, and it would have a 10% salvage value at the end of its 15-year useful life. The company estimates that the following annual costs and revenues would be associated with the ride: (Ignore income taxes.)

Compute the pay back period associated with the new ride

2) Sharp Company has $15,000 to invest. The company is trying to decide between two alternative uses of the funds as follows:

Invest in Invest in

Project A Project B

Investment required $ 15,000 $ 15,000

Annual cash inflows $ 4,000 $ 0

Single cash inflow at the end of 10 years $ 60,000

Life of the project 10 years 10 years

Sharp Company uses a 16% discount rate. (Ignore income taxes.)

Required:

a. Determine the net present value. (Negative amounts should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.)

3) Wriston Company has $300,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:

A B

Cost of equipment required $ 300,000 $ 0

Working capital investment required $ 0 $ 300,000

Annual cash inflows $ 80,000 $ 60,000

Salvage value of equipment in seven years $ 20,000 $ 0

Life of the project 7 years 7 years

The working capital needed for project B will be released for investment elsewhere at the end of seven years. Wriston Company uses a 20% discount rate. (Ignore income taxes.)

Required:

a. Calculate net present value for each project. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.)

4) On January 2, Fred Critchfield paid $18,000 for 900 shares of the common stock of Acme Company. Mr. Critchfield received an $0.80 per share dividend on the stock at the end of each year for four years. At the end of four years, he sold the stock for $22,500. Mr. Critchfield has a goal of earning a minimum return of 12% on all of his investments. (Ignore income taxes.)

Required:

a. Determine the net present value. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)

#### Solution Summary

Four Capital Budgeting problems on Payback period, NPV etc. have been solved.