Question

1.Fly High Inc. intends to invest in a new airplane. Information regarding the investment in the airplane is given below:

Project A

Life of project    5 years

Initial investment            $31,592,700

Net annual after-tax cash inflow $7,500,000

The cost of capital for the company is 8%. Calculate the internal rate of return (IRR) for the new airplane.

a.10%

b.6%

c.8%

d.5%

2.

There are four mutually exclusive projects, Project 1, Project 2, Project 3, and Project 4, whose internal rates of return (IRR) are 5%, 22%, 12%, and 15% respectively. A company wants to invest in one of these projects. Based on the given information, which of the following projects should the company invest in?

a.Project 3

b.Project 4

c.Project 1

d.Project 2

3.

If Sam requires $2,250 in 2 years from now, assuming that the interest rate provided by his bank is 5% per annum, then today he should invest _____. (Round your answer to two decimal places.)

a.$2,225.15

b.$2,000.00

c.$2,040.82

d.$2,333.33

4.

Ebony Inc., a tire manufacturing company, is planning to invest $900,000 for the production of soft compound tires. The investment is expected to provide an annual return of $100,000. The estimated life of the project is 10 years. Additionally, working capital is expected to increase by $100,000. The firm expects to recover the investment in working capital at the end of the project's life. If the required rate of return for the project is 8%, what is the net present value (NPV) of the project?

Period   1              2              3              4              5

8%          0.92593                 0.85734                 0.79383                 0.73503                 0.68058

Period   6              7              8              9              10

8%          0.63017                 0.58349                 0.54027                 0.50025                 0.46319

a.$-282,673

b.$-505,863

c.$700,000

d.$-1,057,904

Answer 1

1.IRR is the rate at which NPV = 0

Let it be x

31,592,700 = 7,500,000*PVAF(x%, 5 years)

PVAF(x%, 5 years) = 4.21236

Using present value annuity factor table, x = 6%

Hence, the answer is b.6%

2.Should invest in project with Highest IRR

i.e. d.Project 2

3.Should invest = 2250/(1.05)^2

= $2,040.82

i.e. c.

4.NPV = Present value of cash inflows – Present value of cash outflows

= -900,000-100,000+100,000*6.71008 + 100,000*0.46319

= -$282,673

i.e. a