Question

1. A project with an initial investment of $66000 and a profitability index of 1.239 also has an internal rate of return of 12%. The present value of net cash flows is

A. $73920.

B. $81774.

C. $53269.

D. $66000.

2.Skysong Co. purchased some equipment 3 years ago. The company's required rate of return is 12%, and the net present value of the project was $(1100). Annual cost savings were: $9000 for year 1; 7000 for year 2; and $5000 for year 3. The amount of the initial investment was

Present Value                   PV of an Annuity

Year                       of 1 at 12%                          of 1 at 12%

1                           0.893                                    0.893      

2                           0.797                                    1.690      

3                           0.712                                    2.402      

1. $18276.
2. $15714.
3. $17914.

3.Use the following table,

	Present Value of an Annuity of 1
Period	8%	9%	10%
1	0.926	0.917	0.909
2	1.783	1.759	1.736
3	2.577	2.531	2.487

A company has a minimum required rate of return of 8%. It is considering investing in a project that costs $283472 and is expected to generate cash inflows of $112000 each year for three years. The approximate internal rate of return on this project is

A. 8%.

B. 9%.

C. the IRR on this project cannot be approximated.

4.Larkspur, Inc. is considering the purchase of a new machine for $520000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $91000. It is believed that the new machine will reduce downtime because of its reliability. Assume the discount rate is 8%. In order to make the project acceptable, the increase in cash flows per year resulting from reduced downtime must be at least

Year	Present Value of 1 at 8%	PV of an Annuity of 1 at 8%
1	.926	.926
2	.857	1.783
3	.794	2.577
4	.735	3.312
5	.681	3.993

A. $19816 per year.

B. $38974 per year.

C. $15899 per year.

D. $39228 per year.

Answer 1

The answer has been presented in the supporting sheet,