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Question 1: (10 points). (Net present value calculation) Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $4,000,000 and would generate annual net cash inflows of $900,000 per year for 7 years. Calculate the project’s NPV using a discount rate of 5 percent. (Round to the nearest dollar.)
| a. If the discount rate is 5 percent, then the project’s NPV is: | $ |
Question 2: (30 points).(Net present value calculation) Big Steve’s, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $90,000 and will generate net cash inflows of $19,000 per year for 11 years. To answer Orange item questions, keep thetextthat is the best answer.
- What is the project’s NPV using a discount rate of 7 percent?(Round to the nearest dollar.)
| If the discount rate is 7 percent, then the project’s NPV is: | $ |
Should the project be accepted?
| The project | should be or should not be | accepted because the NPV is | ||||
| positive or negative | and therefore | adds or subtracts | value to the firm. | |||
- What is the project’s NPV using a discount rate of 16 percent?
| If the discount rate is 16 percent, then the project’s NPV is: | $ |
Should the project be accepted? Why or why not?
- What is this project’s internal rate of return? (Round to two decimal places.)
| This project’s internal rate of return is: | % |
Should the project be accepted? Why or why not?
| If the project’s required discount rate is 7%, then the project | should be or should not be | ||
| accepted because the IRR is | higher than or lower than | the required discount rate. | |
| If the project’s required discount rate is 16%, then the project | should be or should not be | ||
| accepted because the IRR is | higher than or lower than | the required discount rate. | |
Question 3: (15 points). (Related to Checkpoint 11.2) (Equivalent annual cost calculation) Barry Boswell is a financial analyst for Dossman Metal Works, Inc. and he is analyzing two alternative configurations for the firm’s new plasma cutter shop. The two alternatives that are denoted A and B below perform the same task and although they each cost to purchase and install they offer very different cash flows. Alternative A has a useful life of 7 years whereas Alternative B will only last for 3 years. The after-tax cash flows from the two projects are as follows:
