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# profitablity index

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Capital Budgeting Practice Problems
a. Consider the project with the following expected cash flows:

Year Cash flow
0 - \$550,000
1 \$ 90,000
2 \$100,000
3 \$450,000

If the discount rate is 0%, what is the project's net present value?
If the discount rate is 4%, what is the project's net present value?
If the discount rate is 8%, what is the project's net present value?
If the discount rate is 10%, what is the project's net present value?
What is this project's internal rate of return?

b. Consider a project with the expected cash flows:

Year Cash flow
0 - \$315,000
1 + 71,000
2 + 150,000
3 + \$150,000

What is this project's internal rate of return?
If the discount rate is 0%, what is this project's net present value?
If the discount rate is 4%, what is this project's net present value?

If the discount rate is 8%, what is this project's net present value?

If the discount rate is 12%, what is this project's net present value?

I think by using the present value formulas for each but not sure how to get the entire group years this in refreance to both questions?

c. A project requiring a \$3.3 million investment has a profitability index of 0.96. What is its net present value?

https://brainmass.com/economics/personal-finance-savings/profitablity-index-184018

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Help is given with the profitablity index.

\$2.19

## Calculating NPV, Profitability Index and IRR

1.TLC Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn't equipped to do. Estimates regarding each machine are provided below:

Machine A Machine B
Original Cost \$78,000 \$190,000
Estimated life 8 years 8 years
Salvage value 0 0
Estimated annual cash inflows \$20,000 \$40,000
Estimated annual cash outflows \$5,000 \$9,000

Calculate the net present value and profitability index of each machine. Assume a 9% discount rate. Which machine should be purchased.

2.Kendra Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for \$425,000. The company believes that with this new machine it will improve productivity and increase quality, resulting in an increase in net annual cash flows of \$95,000 for the next 6 years. Management requires a 10% rate of return on all new investments.

Calculate the internal rate of return on this new machine. Should the investment be accepted?

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