Question

6. You are considering a herd improvement that will cost $7,000, but yield year-end cash returns of: $2,000, $2,500, and $3,000 in the following three years. Assuming a 7% required- rate-of-return, would you make this investment? a. NPV = b. IRR = c. Accept investment Yes No 7. Norma and Fred Buvalot are buying a new combine. They have narrowed their options to two combines and must purchase one. Each combine will provide the same cash inflows, but differ in initial cost, operating costs and salvage value. Machine A's purchase price is $120,000, will cost $2,500 per year to run, and has a salvage value of $10,000. Machine B is priced at $100,000, will cost $3,000 per year to run, and has a salvage value of $5,000. Both machines have a useful life of ten years. Based on the net present value method and a 9% cost of capital, which machine should they buy? a. NPVa= b. NPVb = 8. What is the internal rate-of-return for an investment of $30,000 and uniform annual returns of $5,000 for the next eight years? 9. Describe the sequence of steps involved in investment analysis.

Answer 1

a.

Prepare the table to compute NPV using MS-Excel as follows:

А в Net present Value 2 3 Time Cash flows Present Value factor @ 7% Present Value O -7000 =1/(1+7% 0 =B3*C3 2000 =1/(1+7%A1 =B4*C4 2 2500 =1/(1+7%)^2 =B5 C5 3 3000 =1/(1+7% 3 =B6*C6 Net present Value =SUM(D3:06) 5 6

The result of the table is as follows:

A Net present Value 2 Time Cash flows Present Value factor @ 7% Present Value 0 ($7,000) 1 ($7.000.000000000000) 1 $2.000 0.934579439 $1.869.158878504670 2 $2,500 0.873438728 $2.183.596820683030 6 3 $3,000 0.816297877 $2,448.893630672560 7 Net present Value (S498.350670139742)

Hence, the net present value is ($498.350670139742).

b.

Prepare the table to compute the internal rate of return using Ms-Excel as follows:

B 1 Internal rate of return 2 Time Cash flows 30 - 7000 2000 2500 63 3000 7 Internal rate of return =IRR(B3-B6) 5 2

The result of the above table is follows:

B Internal rate of return 2 Time Cash flows (S7,000) $2,000 $2,500 $3.000 7 Internal rate of return 3.30353312445568%

Hence, the internal rate of return is 3.30353312445568%.

c.

The project should not be selected as the net present value of the project is negative.