Question

1. Alan is considering the purchase of an $11,000 commercial printer, scanner, and fax machine for his sandwich shop. Alan will need to borrow the funds at 7% interest and the printer is expected to carry a salvage value of $600 in year 4. The expected returns generated by the printer are as follows:

Year 1 $4000

Year 2 $4200

Year 3 $3800

Year 4 $ 1000

What is the net present value?

What is the internal rate of return?

Should Alan make the investment?

2. The purchase of a copy machine cost $10,000 and the interest rate to borrow the funds is 6%. The machine is expected to last four years. There is $500 salvage value. The expected cash flows are as follows: year 1=$2500, year 2= $3000, year 3=$4000 and year 4= $3500. What is the net present value?
3. Three years ago, Sid purchased a stock for $75. Over the past three years, the stock has paid the following dividends: Year 1= $2.25, Year 2= $2.50, Year 3= $2.75. At the end of the third year, the stock was selling for $85. What was Sid’s compounded internal rate of return?
4. Paul bought some gold coins 12 years ago for $4000. He sold them today for $3726. What is Paul’s rate of return?
5. What is the net present value of the following cash flow stream @ 6% compounded annually?

Stream A:       0    1          2             3           4               5

0.   10     40       70      60          30

       6.Your client is 32 years of age. She wants to begin saving for retirement with the first      

         payment to come the beginning of the year. She can save $6000 per year. She can invest

         in the stock market and earn 12% interest. How much money will she have at age 65.

7. Walker is considering the purchase an ice cream machine for $11,000. To buy it, he would have borrow the money at 9%. The machine is expected to last four years and carry a salvage value of $250. Walker anticipates the following cash flows:

Year 1= 2600

Year 2= $3100

Year 3= $3900

Year 4= $3400.

1. What is the Net Present Value of the investment?
2. What is the Internal Rate of Return?
3. Should Walker make the investment?

8. Robert purchased a new copy machine for his business. The copy machine was

purchased for $10,000 and is expected to generate the following cash flows for the next four years:

Year 1:$3000, Year 2:5000, Year 3: 3600, Year 4: 1500.

Assume the copy machine can be sold for $1800 at the end of year 4. Robert’s required rate of return is 5%. What is the net present value and should the machine be purchased? What is the internal rate of return?

Answer 1

Cost of Debt = borrowing cost =				7%
So, It will also be required rate of return for this machine.
					P.V.F. @7%	Present value
Cash flow at Year 0
Purchase of machine				-$11,000.00	1	-$11,000.00
Cash flow at Year 1				$4,000.00	0.934579439	$3,738.32
Cash flow at Year 2				$4,200.00	0.873438728	$3,668.44
Cash flow at Year 3				$3,800.00	0.816297877	$3,101.93
Cash flow at year 4				$1,600.00	0.762895212	$1,220.63
($1000 + $600 Salvage value)
NPV						$729.32
IRR	=IRR(E7:E12,10)					10.26%
NPV is positive $729.32. Also IRR 10.26% is greater than required rate of return 7.00%. So Alan should make investment.