HOME WORK SET 4

1.Project S has a cost of \$10,000 and is expected to produce benefits (cash flows) of \$3,000 per year for 5 years. Project L costs \$25,000 and is expected to produce cash flows of \$7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected? Refer to text problems, (10-10). Capital Budgeting Methods

2.You have a project in mind that will be able to meet the strategic objective of your organization. While evaluating the project, you found out that the project would cost \$600,000. Since you are introducing a new potential product in the market, you are very hopeful that your expected inflows will be \$30,000 per quarter for the first two years and then \$90,000 per quarter thereafter. What is the payback period of this project?

a.36 MONTHS

b.38 MONTHS

c.48 MONTHS

d.52 MONTHS

3.Your company can accept one of three possible projects. Project A has a NPV OF \$30,000, it will take 5 years to complete and the associated cost will be \$10,000. Project B has NPV of \$60,000,it will take 3 years to complete and the cost will be \$15,000.Project C has NPV of \$80,000 and it will take 4 years complete and it will cost \$40,000.Based on the information, which project would you pick?

a.They all have the same value

b.PROJECT A

c.PROJECT B

d.PROJECT C

4.Discuss cannibalization

5.Discuss the process of cash flow estimation.

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