Question 1
A project has the following cash flows:
CF 0 –$15,000
CF 1 $4,500
CF 2 $6,800
CF 3 $6,000
CF 4 $4,800
Assuming a required rate of return of 16%, what is this project’s PI?
◦
0.85
◦
1.03
◦
1.20
◦
1.33
Question 2
A small manufacturer is considering two alternative machines. Machine A costs $1.4 million, has an expected life of 5 years, and generates after-tax cash flows of $450,000 per year. At the end of 5 years, the salvage value of the machine is zero, but the company will be able to purchase another Machine A at a cost of $1.3 million. The second Machine A will generate after-tax cash flows of $475,000 a year for another 5 years, at which time its salvage value will again be zero. Alternatively, the company can buy Machine B at a cost of $1.9 million today. Machine B will produce after-tax cash flows of $500,000 a year for 10 years, after which it will have an after-tax salvage value of $100,000. Assume that the cost of capital is 13%. Based on the equivalent annual annuity, if the company chooses the machine that adds the most value to the firm, by how much will the company’s value increase per year?
◦
$79,757.41
◦
$155,278.80
◦
$383,946.95
◦
$842,580.57
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