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Module 6 Problem Set
NAME___________________________________________________
Section 1 Problem: (Show all work for full credit.)
1.A project has the following estimated cash flow stream:
Year
|
Cash Flow
|
Cumulative
|
0
|
-$4,800
|
-4,800
|
1
|
1,200
|
-3,600
|
2
|
2,500
|
-1,100
|
3
|
3,400
|
2,300
|
4
|
1,700
|
4,000
|
Refer to the Table above. What is the
Payback Period
for this project? (Show your work.)
Payback Period = A + B / C
2+ 1100 / 2400
2.45 years
If the company wants to make its money back within 3.5 years, does it accept or reject the project based on the payback period?_______________________________
Explain.______________________________________________
If the payback period is 2.45 years and the company wants to make its money back with in 3.5 years, it should accept the project based on the pay back period because it is a shorter period of time.
2. Assume an investment project has an initial cost of $8,000 to cover the purchase of new equipment. It is estimated the new equipment will bring in an additional cash flow for the next four years. The expected annual cash flow from the use of the equipment is a positive cash flow of $7,000 for Year 1, $7,500 for Year 2, $8,000 for Year 3, and $8,500 for Year 4. These cash flows are entered in the Table below.
Year
|
Cash Flow
|
PV Cash Flow
|
Cumulative
|
0
|
-8,000
|
|
-8,000
|
1
|
7000
|
|
-1,000
|
2
|
7500
|
|
6,500
|
3
|
8000
|
|
14,500
|
4
|
8500
|
|
23,000
|
Given the company’s wacc =14%, calculate the
Discounted Payback Period
for this investment project._____________(Show your work.)
Given the company’s criteria is 2.5 years, based on the Discounted Payback Period will the company accept or reject this project. ___________
Explain___________________________________________________________________
3. Assume a project is expected to provide a positive cash flow of $14,000 per year for the next 5 years followed by a clean-up cost of 10,000 for year 6. Given the initial cost or dollar outlay today is $50,000, answer the following:
A)If the wacc = 8%, what is the NPV for the project? ______________(Show your work by providing the inputs and outputs for the financial calculator.)
B)If the wacc = 16%, what is the NPV for the project? _____________
C)At what interest rate, would NPV equal 0? _____________(Hint: calculate IRR)
______________(Show your work by providing the inputs and outputs for the financial calculator.)