1.$500 today and expect to receive $ 50,000 in 40 years.
Your cost of capital for this (very risk) opportunity is 15%.
What is the IRR? What does the IRR rule say
about whether the investment should be undertaken?
What is the NPV? What does the NPV rule suggest?
What is the IRR?
The IRR of this investment opportunity is
_________%(round to one decimal place.)
2. You are a real estate agent thinking of placing a sign
advertising your services at a local bus stop. The sign will cost $8,000 and
will be posted for one year. You expect that it will generate additional
revenue of $ 1,040 a month. What is the payback period?
The payback period is ________months.(round to two decimal
3. You are considering making a movie. The movie is expected
to cost $10.6 million upfront and take a year to make. After that, it is
expected to make $4.4 million in the year it is released (end of year 2) and $
1.9 million for the following four years (end of years 3 through6). What is the
payback period of this investment? If you require a payback period of two
years, will you make the movies? Does the movie have positive NPV if the cost
of capital is 10.5%?
The payback period is __________years. (round up to nearest
Based on the payback period requirement, would you make this
movie?____.(select from the drop-down menu.)
4. AOL is considering two proposals to overhaul its network
infrastructure . They have received two
bids. The first bid from Huawei will require a $ 15 million upfront investment
and will generate $20 million in savings for AOL each year for the next 3
years. The second bid from Cisco requires a $80 million upfront investment and
will generate $60 million in savings each year for the next 3 years.
What is the IRR for AOL associated with each
If the cost of capital for each investment is
15%, what is the Net Present Value(NPV) of each bid?_______
Suppose Cisco modifies its bid by offering a lease contract
instead. Under the terms of the lease, AOL will pay $22 million upfront, ad $35
million per year for the next 3 years. AOL savings will be the same as with
Cisco’s original bid.
What is the IRR of the Cisco bid now?____
What is the new NPV?_____
should AOL do?_____
A. What is the IRR for AOL associated with each bid? The IRR associated with the first bid from
Huawe is _______%.(round to one decimal place.)
5. Natasha’s Flowers, a local florist, purchases fresh
flowers each day at the local flower market. The buyer has a budget of $1,040
per day to spend. Different flowers have different profit margins, and also a
maximum amount the shop can sell.
Based on past experience the shop has estimated the
following NPV of purchasing each type:
bunch Cost per bunch Max. Bunches
$6 $34 10
What combination of flowers the shop should purchase each
(select from the drop-down menus in descending order of
their profitability- index values. Round the investment amounts to the nearest
The combination of flowers the shop should purchase each day
is $___of_____,$______ of______,
6. Pisa Pizza, a seller of frozen pizza, is considering
introducing a healthier version of its pizza that will be low in cholesterol
and contain no trans fats. The firm expects that a sales of the new pizza will
be $18 million per year. While many of these sales will be to new customers,
Pisa Pizza estimates that 30% will come from customers who switch to the new,
healthier pizza instead of buying the original version
A. Assume customers will spend the same amount on either
version. What level of incremental sales is associated with introducing the new
The incremental sales are$_ _______million.(round to the
7. Cellular Access Inc. is a cellular telephone service
provider that reported net operating profit after tax(NOPAT) of $255 million
for the most recent fiscal year. The
firm had depreciation expenses of $130 million, capital expenditures of $190
million, and no interest expenses. Working capital increased by $11 million .
Calculate the free cash flow for Cellular Access for the most recent fiscal
The free cash flow is $_____ million.( round to the nearest
8. Castle View Games would like to invest in a division to
develop software for video games. To evaluate this decision, the firm first
attempts to project the working capital needs for the this operation. Its chief
financial officer has developed the following estimates( in millions of
Year1 Year2 Year3 Year4 year5
Cash 7 11 16 16 16
19 26 26 25 25
Inventory 6 9 12 14 15
Accounts payable 16 20 25 28 34
Assuming that Castle View currently does not have any
working capital invested in this division, calculate the cash flows associated
with changes in working capital for the first five years of this investment.(Enter
decreases as negative numbers.)
9. Markov Manufacturing recently spent $16 million to
purchase some equipment used in the manufacture of disk drives, The firm
expects that this equipment will have a useful life of five years, and its
marginal corporate tax rate is 28%. The company plans to use straight-line
What is the annual depreciation expense is $
______ million.(round to two decimal places.)
10. Bauer Industries is an automobile manufacturer.
Management is currently evaluating a proposal to build a plant that will manufacture
lightweight trucks. Bauer plans to use a cost of capital of 12% to evaluate
this project. Based on extensive research, it has prepared the following
increment free cash flow projections (in millions of dollars):
Free Cash Flow ($000,000s) Y ear0 Year1-9 Year10
-Manufacturing expenses(other than depreciation) -36.00
=Unlevered net income 32.63 32.63
- Increases in Net Working Capital -5.00 -5.00
=Free cash flow -148.00 42.43 53.43
For this base case scenario, what is the NPV of
the plant to manufacture lightweight trucks?
Based on input from the marketing department,
Bauer is uncertain about its revenue forecast. In particular, management would
like to examine the sensitivity of the
NPV to the revenue assumptions. What is the NPV of this project if
revenues are 10% higher than forecast? WHAT IS THE NPV IF REVENUES ARE 10%
LOWER THAN FORECAST ?
A. For this base case scenario the NPV is $ _________
million. (round to two decimal places.)