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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
  • MS, University of Wisconsin-Madison
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