Purchase Solution

Time Value of Money, NPV and IRR

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1. XYZ has decided to join a national franchise. Annual year-end cash flow is expected to increase by \$10,000. At a 12 percent effective required return, what is the value of the franchise affiliation?

2. XYZ purchased new 20-year 6% bonds of BMC Corporation for \$100,000 each when they were issued two years ago. Interest rates on investments of this type have fallen to 5% since then. What is the value of these bonds today?

3. An asset will generate cash flows of \$250,000 a year for 10 years, with cash flow
spread evenly over the year. At a 12% effective required return, what is the value of asset?

4. XYZ is considering a new business development program. Anticipated benefits are \$200,000 in the first year, \$250,000 in second year, and \$400,000 in the third year. Benefits will decline 10 percent a year after the third year, and will end after the tenth year. Assume these benefits are received at year-end. The effective required returned return is 10 percent. What is the present value of these benefits? If the development program requires an initial outlay of \$500,000, what is the net present value?

5. The manager at XYZ proposed a portable service unit requiring an initial outlay of \$100,000 and providing the following year-end cash flows:

Year 1 2 3 4 5
Cash Flows \$30,000 -\$50,000 \$70,000 \$60,000 \$50,00

At a 10 percent required return, find the net present value, the profitability index, the payback period and present value payback period. Interpret these measures for a manager who is not trained in finance.

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• BE, Bangalore University, India
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