Question

1) A machinery upgrade project will cost $14 million, and produce cost savings of $1 million in perpetuity.

What is the project NPV if the required rate of return is 11%?

Enter answer in millions, to two decimal places.

2)

Your company is considering a project that requires an initial investment of $12 million, and is expected to produce cash flows of $4 million each year for 10 years. At the end of year 11, the project will require site cleanup that is expected to cost $11 million. What is the project NPV if the company uses 12% as its cost of capital?

Enter answer in millions, to two decimal places.

3)A project with an initial cost of $591 is expected to produce a stable cash inflow for 9 years. Using a required return of 11%, it has been determined that the project's NPV is 82. What must be the size of each of the annual cash flows?

Answer 1

Please provide rating..

Answer 1
	Machine cost		14	mil
	Annual cost saving		1	mil
	required rate =		11%
	PV of annuity = A/I = 1mil/11%		9.09	mil
	NPV = PV of cash flow - initial cost =
	=9.09-11		(4.91)	mil
	Note : NPV is negative
Answer 2
		i	ii	iii=i*ii
	Year	Cash flow	PVIF @ 12%	present value
	0	-12	1.0000	(12.00)
	1	4	0.8929	3.57
	2	4	0.7972	3.19
	3	4	0.7118	2.85
	4	4	0.6355	2.54
	5	4	0.5674	2.27
	6	4	0.5066	2.03
	7	4	0.4523	1.81
	8	4	0.4039	1.62
	9	4	0.3606	1.44
	10	4	0.3220	1.29
	11	-11	0.2875	(3.16)
				7.44
	NPV =	7.44	mil
Answer 3
	Lets assume that annual cash flow = x
	Therefore we have PV = 82 at 11% required rate of return
	PVIFA @ 11% for 9 year =	5.5370	(From PVIFA table)
	we have below equation for NPV
	X*5.5370-591 = 82
	X =	=(591+82)/5.537
	Annual cash flow	121.55