Question 1
Van Auken Inc. is considering a project that has the following cash flows:
Year | | Cash Flow |
0 | | –$1,000 |
1 | | $500 |
2 | | $200 |
3 | | $400 |
4 | | $400 |
| | | |
The company’s WACC is 10%. What are the project’s payback, IRR, and NPV?
◦
payback = 2.25, IRR = 18.91%, NPV = $169
◦
payback = 2.25, IRR = 19.50%, NPV = $183
◦
payback = 2.75, IRR = 18.91%, NPV = $169
◦
payback = 2.75, IRR = 19.50%, NPV = $183
Question 2
Walker & Campsey wants to invest in a new computer system, and management has narrowed the choice to Systems A and B.
System A requires an up-front cost of $120,000, after which it generates positive after-tax cash flows of $80,000 at the end of each of the next 2 years. System B also requires an up-front cost of $120,000, after which it generates positive after-tax cash flows of $58,000 at the end of each of the next 3 years. The company’s cost of capital is 12%. Based on the equivalent annual annuity, which system will be chosen?
◦
A for $8,038.03
◦
B for $8,038.03
◦
A for $8,996.18
◦
B for $8,996.18
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