Question

The company COMPRI, Inc. is studying an investment that has an initial payment of 10.000€ and...

The company COMPRI, Inc. is studying an investment that has an initial payment of 10.000€ and which is expected to generate the following cash-flows: 5.000€ the first year, 6.000€ the second and third year, and 8.000€ the fourth and fifth year. If there was no inflation, the profitability expected by the partners of COMPRI Inc is 5%, but prices increase at a rate of 8% yearly.

a) What is the pay-back period for this investment?

b) What is the required profitability accounting for the effect of inflation?

c) What is the NPV of the investment?

d) Considering the NPV obtained in the last question, is the investment feasible?

e) Which one of the following values corresponds to the IRR of the investment?

x. - 0,1234 y. 0,72431 z. 0,524968

f) A second investment is being considered. This one has an initial payment of 20.000€ and is expected to have the 6.000€, 7.000€, 8.000€, 9.000€, 10.000€ According to the NPV, which of the investments is better and  suppose the first investment is carried out in Spain, while the second is carried out in Germany. The difference in risk premiums between countries is 3%. Which of the investments is now preferable?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a) pay back period = intial investment/cash inflows =10/ 33 = 0.303 years

b) due to inflation profitability use to decrease to overcome it we need invest in such an option where returns rate is more than inflation.

c) rate of discounting (r) = 8%, NPV = Inflow - outflow

present value of inflow = 5/(1+8/100)1 +6/(1+8/100)2 +6/(1+8/100)3 +8/(1+8/100)4 +8/(1+8/100)5

=25.8616

NPV = 25.8616-10 = 15.8616 euro

d) yes investment is feasible because NPV is positive.

e) irr is the rate where npv =0, inflow = ouflow, options are not clearly mentioned.

f) Present value of inflow= 6/(1+8/100)1+ 7/(1+8/100)2+ 8/(1+8/100)3 +9/(1+8/100)4+10/(1+8/100)5

= 31.331

NPV = 31.331 - 20 = 11.331 EURO

first investment is better because it has more NPV & returns on investment.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
SI Inc has an investment opportunity to produce baseball caps. The required initial investment on equipment...
SI Inc has an investment opportunity to produce baseball caps. The required initial investment on equipment is $9,000. The firm will depreciate the equipment on a straightline basis to zero salvage value over the three-year life of the project. The equipment can be sold at the end of the project life for 30% of its purchase price. Sales is expected to be $7,000 each year and the variable costs are expected to be 40% of the sales revenue each year....
2. company has been presented with the following investment opportunity. The initial investment is expected to...
2. company has been presented with the following investment opportunity. The initial investment is expected to be $380,000. The operating cash flows are expected to be $120,000 in year 1, $120,000 in year 2, $120,000 in year 3, $80,000 in year 4, $80,000 in year 5 and $50,000 in year 6. If your cost of capital is 14%, what is the NPV and IRR for the project? Should they accept?
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.6 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $455,000. The project is expected to generate $3.2 million in annual sales, with annual expenses of $970,000. The project will require an initial investment of $505,000 in NWC that will be returned at the end of...
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.75 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $390,000. The project is expected to generate $2.55 million in annual sales, with annual expenses of $905,000. The project will require an initial investment of $440,000 in NWC that will be returned at the end of...
11) Trident — the same U.S.-based company discussed in this chapter, has concluded a second larger...
11) Trident — the same U.S.-based company discussed in this chapter, has concluded a second larger sale of telecommunications equipment to Regency (U.K.). Total payment of £2,000,000 is due in 90 days. Given the following exchange rates and interest rates, how much is the dollar receipt of money market hedge at the end of 90 days? Assumptions Value 90-day A/R in pounds £2,000,000.00 Spot rate, US$ per pound ($/£) $1.5610 90-day forward rate, US$ per pound ($/£) $1.5421 3-month U.S....
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.55 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $450,000. The project is expected to generate $3.15 million in annual sales, with annual expenses of $965,000. The project will require an initial investment of $500,000 in NWC that will be returned at the end of...
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.85 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $400,000. The project is expected to generate $2.65 million in annual sales, with annual expenses of $915,000. The project will require an initial investment of $450,000 in NWC that will be returned at the end of...
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $2.7 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $385,000. The project is expected to generate $2.5 million in annual sales, with annual expenses of $900,000. The project will require an initial investment of $435,000 in NWC that will be returned at the end of...
Vivant Solar is considering another project. The project has initial investment cost of $18 million and...
Vivant Solar is considering another project. The project has initial investment cost of $18 million and will return $7.75 million a year in real terms over the next 3 years. Because of changing economic conditions, you expect inflation to be 5% for all years after the first payment in T1. The nominal project discount rate applicable for all periods is 9%. Draw a time line of project cash flows and calculate the nominal NPV of the project.
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of...
Simmons, Inc., is considering a new 4-year project that requires an initial fixed asset investment of $3.65 million. The fixed asset is eligible for 100 percent bonus depreciation in the first year. At the end of the project, the asset can be sold for $460,000. The project is expected to generate $3.25 million in annual sales, with annual expenses of $975,000. The project will require an initial investment of $510,000 in NWC that will be returned at the end of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT