Project Evaluation Assignment | Homework Help Websites
FIN 370
NPV Problem Set
- You have the following information to evaluate a project and make a decision whether you should accept the project:
Purchase price = $120,000 (20 year life, straight-line depreciation, zero salvage value).
Operating expenses will decrease from $30,000 to $20,000.
Revenue will increase from $50,000 to $57,000.
Marginal tax rate = 40%
Risk-free rate = 2.5%
Return on the market = 5.5%
Beta = 1.5
Should you accept this project? Why?
- Evaluate the following project.
Year CF ALPHA
0 -20,000 1.00
1 6,000 .95
2 5,000 .90
3 8,000 .80
4 10,000 .75
- If the project has a beta equal to 1.3, the return on the market is 8%, and the risk-free rate is 6%. Use the risk-adjusted discount approach to evaluate this project. Should you accept this project?
- Using the certainty equivalent approach, should you accept the project?
- You are considering two mutually exclusive projects that offer the following net cash flows.
Year A B
0 -30,000 -30,000
1 10,500 6,500
2 10,500 6,500
3 10,500 6,500
4 10,500 6,500
5 6,500
6 6,500
7 6,500
8 6,500
- Compute the NPV of each project at a 12% cost of capital.
- Create a replacement chain assuming that the reinvestment and estimated cash flows remain the same.
- Which project should you accept?
- Use the equivalent annual annuity approach to solve the problem. How does it compare to the answer in part C?
