Benjamin Designs has prepared the following estimates for a long-term project it is considering.

The initial investment is $18,250, an

inflows of $4,000 per year for 7 years. The firm has a 10% cost of capital.
a. Determine the net present value (NPV) for the project.
b. Determine the internal rate of return (IRR) for the project.
c. Would you recommend that the firm accept or reject the project? Explain your answer.

a. NPV
Year Cashflow Discount Factor DCF
0 -18,250.00 1.00000 -18,250.00
1 4,000.00 0.90909 3,636.36
2 4,000.00 0.82645 3,305.79
3 4,000.00 0.75131 3,005.26
4 4,000.00 0.68301 2,732.05
5 4,000.00 0.62092 2,483.69
6 4,000.00 0.56447 2,257.90
7 4,000.00 0.51316 2,052.63
NPV 1,223.68 positive npv so yes
IRR 12%
PI 1.07
nitial investment is $18,250, and the project is expected to yield after-tax cash
Perky Foods is considering acquisition of a new wrapping machine. The initial investment is estimated at $1.25 million, and the
salvage value. Using a 6% discount rate, determine the net present value (NPV) and Profitability Index (PI) of the machine give
in the following table. Based on the project’s NPV, should Perky make this investment?

Year Cash inflow Discount Factor DCF

0 -1250000 1 -1250000
1 400,000 0.943396226415094 377358.490566038
2 375,000 0.88999644001424 333748.66500534
3 300,000 0.839619283032302 251885.78490969
4 350,000 0.79209366323802 277232.782133307
5 200,000 0.747258172866057 149451.634573211
NPV 139677.357187587 yes
IRR 10%
PI 1.11174188575007
stimated at $1.25 million, and the machine will have a 5-year life with no
lity Index (PI) of the machine given its expected operating cash inflows shown
Janet Jones has researched the financial pros and cons of entering into an elite MBA program at her state university. The tuitio
have an upfront cost of $100,000. On average, a person with an MBA degree earns an extra $20,000 per year over a business
opportunity cost of capital is 6%. Given her estimates, find the net present value (NPV) and Profitability Index (PI) of entering t
education worth the associated costs?

Year Cashflow Discount Factor DCF

0 -100,000.00 1.00 -100,000.00
1 20,000.00 0.94 18,867.92
2 20,000.00 0.89 17,799.93
3 20,000.00 0.84 16,792.39
4 20,000.00 0.79 15,841.87
5 20,000.00 0.75 14,945.16
6 20,000.00 0.70 14,099.21
7 20,000.00 0.67 13,301.14
8 20,000.00 0.63 12,548.25
9 20,000.00 0.59 11,837.97
10 20,000.00 0.56 11,167.90
11 20,000.00 0.53 10,535.75
12 20,000.00 0.50 9,939.39
13 20,000.00 0.47 9,376.78
14 20,000.00 0.44 8,846.02
15 20,000.00 0.42 8,345.30
16 20,000.00 0.39 7,872.93
17 20,000.00 0.37 7,427.29
18 20,000.00 0.35 7,006.88
19 20,000.00 0.33 6,610.26
20 20,000.00 0.31 6,236.09
21 20,000.00 0.29 5,883.11
22 20,000.00 0.28 5,550.10
23 20,000.00 0.26 5,235.95
24 20,000.00 0.25 4,939.57
25 20,000.00 0.23 4,659.97
26 20,000.00 0.22 4,396.20
27 20,000.00 0.21 4,147.36
28 20,000.00 0.20 3,912.60
29 20,000.00 0.18 3,691.13
30 20,000.00 0.17 3,482.20
31 20,000.00 0.16 3,285.10
32 20,000.00 0.15 3,099.15
33 20,000.00 0.15 2,923.72
34 20,000.00 0.14 2,758.23
35 20,000.00 0.13 2,602.10
36 20,000.00 0.12 2,454.82
37 20,000.00 0.12 2,315.86
38 20,000.00 0.11 2,184.78
39 20,000.00 0.10 2,061.11
40 20,000.00 0.10 1,944.44

NPV 200,925.94
PI 3.01
IRR 20%
m at her state university. The tuition and needed books for a master’s program will
$20,000 per year over a business career of 40 years. Janet feels that her
rofitability Index (PI) of entering this MBA program. Are the benefits of further
The HDBC Corp. has been growing very rapidly in recent years, making its shareholders rich in the process. The average annual rate
years has been 20%, and HDBC managers believe that 20% is a reasonable figure for the firm’s cost of capital. To sustain a high grow
company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. T
production capacity, and the second project involves introducing one of the firm’s existing products into a new market. Cash flows fr
table.
a. Calculate the NPV, IRR and PI for both projects.
b. Rank the projects based on their NPV, IRR and PI
c. Do the rankings in part b agree or not? If not, why not?

d. The firm can only afford to undertake one of these investments, and the CEO favors the product introduction because it offers a h
return (that is, a higher IRR) than the plant expansion. What do you think the firm should do? Why?

Year Plant expansion Product

introduction
0 -3,500,000 -500,000
1 1,500,000 250,000
2 2,000,000 350,000
3 2,500,000 375,000
4 2,750,000 425,000

Year Plant expansion DF DCF

0 -3,500,000 1 -3,500,000
1 1,500,000 0.833333333333333 1,250,000
2 2,000,000 0.694444444444444 1,388,889
3 2,500,000 0.578703703703704 1,446,759
4 2,750,000 0.482253086419753 1,326,196
NPV 1,911,844
IRR 44%
PI 1.5462411816578

Product
Year DF DCF
introduction
0 -500,000 1 -500000
1 250,000 0.833333333333333 208333.333333333
2 350,000 0.694444444444444 243055.555555556
3 375,000 0.578703703703704 217013.888888889
4 425,000 0.482253086419753 204957.561728395
NPV 373360.339506173
IRR 52%
PI 1.7467206790123
ocess. The average annual rate of return on the stock in the last few
capital. To sustain a high growth rate, the HDBC CEO argues that the
s are currently under review. The first is an expansion of the firm’s
to a new market. Cash flows from each project appear in the following

ntroduction because it offers a higher rate of

The Squench Company is involved in searching for locations in which to drill for oil. The firm’s current project requires an initial investment
estimated life of 10 years. The firm's cost of capital is 13%. The expected future cash inflows for the project are as shown in the following ta

Year Cash inflows

1 $ 600,000
2 1,000,000
3 1,000,000
4 2,000,000
5 3,000,000
6 3,500,000
7 4,000,000
8 6,000,000
9 8,000,000
10 12,000,000

a. Calculate the project’s net present value (NPV). Is the project acceptable under the NPV technique? Explain.
b. Calculate the project’s internal rate of return (IRR). Is the project acceptable under the IRR technique? Explain.
c. In this case, did the two methods produce the same results? Generally, is there a preference between the NPV and IRR technique
d. Calculate the payback period for the project. If the firm usually accepts projects that have payback periods between 1 and 7 year

a. NPV
rate 13%
Year Cash inflows Discount Factor Discounted Cashflow

0 -15,000,000 1.00000 -15,000,000.00

1 600,000 0.88496 530,973.45

2 1,000,000 0.78315 783,146.68

3 1,000,000 0.69305 693,050.16

4 2,000,000 0.61332 1,226,637.46

5 3,000,000 0.54276 1,628,279.81

6 3,500,000 0.48032 1,681,114.85

7 4,000,000 0.42506 1,700,242.57

8 6,000,000 0.37616 2,256,959.17

9 8,000,000 0.33288 2,663,078.67

10 12,000,000 0.29459 3,535,060.18

NPV 1,698,543.00

b. IRR 15% PI 1.11

ect requires an initial investment of $15 million and has an
are as shown in the following table:

que? Explain.
een the NPV and IRR techniques? Explain.
k periods between 1 and 7 years, is this project acceptable?