1. Hawkeye Harvesters, Inc. is engaged in a contract with the United States Government to supply farm machinery. Hawkeye’s required return is 11.2%. Their marginal tax rate is 35%. HHI must have $100,000 in working capital at the start of the project and must add $10,000 to working capital at the start of years 2, 3, 4, and 5. The project will be discontinued after 5 years with no salvage value on any equipment. What is the effect on NPV of net working capital?
There is no effect on NPV
NPV is reduced by $40,000.
NPV is reduced by $48,554.
NPV is increased by $140,000.
None of the above are within $100 of the correct answer.
2. The De Falla Threecorner Hat Co. has two mutually exclusive possible investments. In the first investment, they will have a cost of $40,000 today, and then will receive payments of $19,000 at the end of each of the next three years. The alternative investment will cost $25,000 today, and then De Falla will receive payments of $13,000 at the end of each of the next three years. At what required rate of return would the two investments have the same NPV?
8.8%
9.7%
10.5%
11.3%
12.5%
3. Dublin Methodist Hospital is considering the purchase of a new rapid diagnostic machine. The system will cost $400,000 and will be depreciated straight-line to zero over its five-year life. It will be worth $50,000 at the end of that time. The hospital will save $130,000 per year in laboratory costs and will also be able to reduce their inventory of lab supplies by $50,000 upon purchasing the new machine. If the tax rate is 35%, what is the IRR for this project?
17.25%
19.93%
22.59%
25.31%
27.25%