21 . You are deciding between two mutually exclusive investment opportunities . Both require the same initial investment of $ 10 million . Investment A will generate $ 2 million per year ( starting at the end of the first year ) in perpetuity . Investment B will generate $ 1.5 million at the end of the first year and its revenues will grow at 2 % per year for every year after that .
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� a . Which investment has the higher IRR ?
� b . Which investment has the higher NPV when the cost of capital is 7 %? c . In this case , for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best opportunity ? Chapter 8 ( 260 – 262 )
1 . 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 sales of the new pizza will be $ 20 million per year . While many of these sales will be to new customers , Pisa Pizza estimates that 40 % 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 pizza ?
b . Suppose that 50 % of the customers who will switch from Pisa Pizza ’ s original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza . What level of incremental sales is associated with introducing the new pizza in this case ?
6 . Cellular Access , Inc . is a cellular telephone service provider that reported net income of $ 250 million for the most recent fiscal year . The firm had depreciation expenses of $ 100 million , capital expenditures of $ 200 million , and no interest expenses . Working capital increased by $ 10 million . Calculate the free cash flow for Cellular Access for the most recent fiscal year .
12 . A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future . It buys chains from an outside supplier at a price of $ 2 a chain . The plant manager believes that it would be cheaper to make these chains rather than buy them . Direct in-house production costs are estimated to be only $ 1.50 per chain . The necessary machinery would cost $ 250,000 and would be obsolete after 10 years . This investment could be depreciated to zero for tax purposes using a 10-year straight-line depreciation schedule . The plant manager estimates that the operation would require $ 50,000 of inventory and other working capital upfront ( year 0 ), but argues that this sum can be ignored because it is recoverable at the end of the 10 years . Expected proceeds from scrapping the machinery after 10 years are $ 20,000 .