Question

1. Fast Machines Inc. must decide whether to upgrade its production facilities, at a cost of $35,770,000. Doing so will allow it to bring several exciting new products to the market. The following table presents the estimated incremental cash flows that would result from the upgrade, over the expected 10-year life of the project:

Years 1-9	$5,750,000
Year 10	$12,000,000

What is the NPV of the project, given that Fast Machines' required rate of return for a project of this nature is 12% p.a.?

Group of answer choices

$680,591

$1,049,521

-$1,268,885

$582,461

None of the other answers is correct

2.

The Dagnabbit Landscaping Company is evaluating a proposal to purchase a new mini loader for $30,074. If it accepts the proposal, the new machine is expected to reduce Dagnabbit's operating costs by $5,000 per year, for the next 10 years. What is the IRR of the project?

Group of answer choices

This question cannot be answered because there is no formula for IRR

10%

10.5%

None of the other answers is correct

11%

3.

Midas Construction is evaluating two alternative graders for its construction operations. The first is a 2010 Caterpillar 140M and the second is a 2011 John Deere 872 GB. The John Deere is newer and more modern and is expected to have an economically useful life of 10 years. The Caterpillar, on the other hand, is likely to last only for 8 years. The following table presents the costs of the two machines and their contribution to Midas' cash flows:

	John Deere	Caterpillar
Year 0	-$236,500	-$214,500
Years 1-8	$50,000	$52,000
Years 9-10	$50,000

Calculate the EAAs for the two graders, using a required rate of return of 12% p.a.

Group of answer choices

The EAA for the John Deere is 7,799 and the EA for the Caterpillar is $7,533

The EAA for the John Deere is $8,143 and the EAA for the Caterpillar is $8,821

None of the other answers is correct

The EAA for the John Deere is $46,011 and the EAA for the Caterpillar is $43,817

The EAA for the John Deere is $13,971 and the EAA for the Caterpillar is $14,037

Answer 1

Ans 1

PW = -35770000 + 5750000(P/A, 12%,9) + 12000000(P/F,12%,10)

PW = -35770000 + 5750000(5.3282498) + 12000000(0.3219732)

PW = -35770000 + 30637436 + 3863678

PW = -12688857 Option C is correct

Ans 2

IRR factor = CF0/Annual CF

IRR factor = 30074/5000 = 6.0148

By looking in Present value of annuity table, in n = 10, it is coming between 10% and 11%, so IRR is 10.5% Option C

Ans 3

EAA John = -236500(A/P, 12%,10) + 50000

EAA John = -236500 (0.176984) + 50000

EAA John = -41856.75 + 50000 = 8143

EAA Caterpillar = -214500(A/P, 12%, 8) + 52000

EAA caterpillar = -214500(0.201303) + 52000

EAA Caterpillar = -43179.46 + 52000 = 8821

Option B is correct, John 8143, caterpillar 8821