Question

Fanning Modems, Inc. (FMI) has several capital investment opportunities. The term, expected annual cash inflows, and the cost of each opportunity are outlined in the following table. FMI has established a desired rate of return of 16 percent for these investment opportunities. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Opportunity Investment term A 4 years $ 4,300 $11,400 5 years $3,500 $10,see s years $ 5,000 $16,600 3 years $ 7,900 $17,800 Expected cash inflow Cost of investment Required a. Compute the net present value of each investment opportunity and record your answers in the following table. The results for Investment Opportunity A have been recorded in the table as an example. b. Determine the net present value and the internal rate of return for each investment opportunity. Record the results in the following table. The results for investment Opportunity A have been recorded in the following table as an example. Note that the manual computation yields the same net present value amounts as the financial function routines of Excel or a financial calculator

Answer 1

Answer (A):

Opportunity A B C 4,300 $ 7,900 $ $ 3,500 $ Cash Inflow 5,000 Times present value factor 2.798181 3.274294 2.245890 3.274294 $ 12,032.18 $ 11,460.03$ 17,742.53$ 16,371.47 $(11,400.00) $(10,500.00) $(17,80oo.00) $(16,600.00) 632.18 $ Present value of cash flows Minus cost of investment -$57.47 -$228.53 Net present value 960.03

Working:

Net Present value = Cash Inflow * present value factor - cost of investment

For example:

Net present value of Opportunity A = 4300 * 2.798181 - 11400 = $632.18

Answer (B):

Opportunity Net present value A B C -$57.47 -$228.53 632.18 S $ 960.03 Internal rate of return 18.75% 19.86% 15.80% 15.41%

Working:

Since cash flows are uniform, we can use excel RATE function to calculate IRR:

IRR of Opportunity A = RATE(nper, pmt, pv, fv, type) = RATE (4, 4300, -11400, 0, 0) = 18.75%

IRR of Opportunity B = RATE (5, 3500, -10500, 0, 0) = 19.86%

IRR of Opportunity C = RATE (3, 7900, -17800, 0, 0) = 15.80%

IRR of Opportunity D = RATE (5, 5000, -16600, 0, 0) = 15.41%