FIN 571 NERD Education Specialist /fin571nerd.com FIN 571 NERD Education Specialist /fin571nerd.com | Page 53

is expected to increase the stockholders’ value by the amount of the
NPV. ignores the inherent risks within the project. guarantees all cash
flow assumptions will be realized. means the present value of the
expected cash flows is equal to the project’s cost. 5.The net present
value method of capital budgeting analysis does all of the following
except: use all of a project's cash flows. discount all future cash flows.
consider all relevant cash flow information. incorporate risk into the
analysis. provide a specific anticipated rate of return. 6.What is the
net present value of a project with an initial cost of $36,900 and cash
inflows of $13,400, $21,600, and $10,000 for Years 1 to 3,
respectively? The discount rate is 13 percent. 7.Maxwell Software,
Inc., has the following mutually exclusive projects. a-1. Calculate the
payback period for each project. (Do not round intermediate
calculations and round your answers to 3 decimal places, e.g.,
32.161.) Payback period Project A
1.938 years Project B 2.063
years ________________________________________ a-2. Which,
if either, of these projects should be chosen? b-1. What is the NPV
for each project if the appropriate discount rate is 15 percent? (A
negative answer should be indicated by a minus sign. Do not round
intermediate calculations and round your answers to 2 decimal places,
e.g., 32.16.) b-2.
Which, if either, of these projects should be
chosen if the appropriate discount rate is 15 percent? 8.Down Under
Boomerang, Inc., is considering a new three-year expansion project
that requires an initial fixed asset investment of $2.82 million. The
fixed asset will be depreciated straight-line to zero over its three-year
tax life, after which it will be worthless. The project is estimated to
generate $2,120,000 in annual sales, with costs of $815,000. The tax
rate is 30 percent and the required return is 12 percent. What is the
project’s NPV? (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.) 9.The Best
Manufacturing Company is considering a new investment. Financial
projections for the investment are tabulated here. The corporate tax
rate is 35 percent. Assume all sales revenue is received in cash, all
operating costs and income taxes are paid in cash, and all cash flows
occur at the end of the year. All net working capital is recovered at the
end of the project.
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