Problem 1) Consider two mutually exclusive projects, A and B. Project A requires an initial cash outlay of $100,000 followed by five years of $30,000 cash inflows. Project B requires an initial cash outlay of $240,000 with cash inflows of $40,000 in the first two years, $80,000 in the next two years, and $100,000 in the fifth year.
1. Compute the IRR for each project.
2. Compute the NPV for each project for each of the following costs of capital: 0%, 4%, 8%, 12% and 16% and record your results in a table.
3. Examine the table created in part "2" and determine the costs of capital for which this project appears feasible. Is your answer consistent with the result of part "1"? Explain your answer.
Problem 2) Jason and Sons is reviewing a project with an initial cash outflow of $250,000. An additional $100,000 will be invested after the first year, followed by an additional investment of $50,000 at the end of the second year. Beginning at the end of year 3, the project is expected to generate cash flows of $90,000 per year for the next eight years.
1. Calculate the project's NPV at a cost of capital of 8%. Calculate the project's IRR.
2. Based on these calculations alone, is this project feasible? What concerns might Jason and Sons have regarding this project beyond considering the financial calculations?
Problem 3) The Salem Motor Company is thinking of automating one of its production facilities. The equipment required will cost a total of $10 million and is expected to last 10 years. The company's cost of capital is 9%. The project's benefits include labor savings and a quality improvement that will lower warranty costs. Estimated cost savings in $1,000's are:
Year 1 574
2 864
3 1,246
4 2,748
5 3,367
6 2,437
7 2,276
8 1,839
9 1,264
10 623
- Find the project's NPV. Evaluate the NPV for each whole integer interest rate (cost of capital) from 6% to 14% (6%, 7%, 8%...14%).
- Determine the project's IRR.
- Based on this information, is the project feasible? At which costs of capital is this project feasible?