Phan nhu y qs170067 fin202 ib17b02 individual assignment (1)

Fundamental of Corporate Finance

FIN202: Fundamental of Corporate Finance

Individual Assignment

Chapter 10: 10.1 – 10.5

10.1 Net present value: Riggs Corp. management is planning to spend $650,000 on a new marketing
campaign. They believe that this action will result in additional cash flows of $325,000 over the next
three years. If the discount rate is 17.5 percent, what is the NPV on this project?
Solution:
NPV = NCF0 +

NCF 1 NCF 2 NCF 3
+
+
(1+k ) ( 1+ k )2 ( 1+ k )3

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Fundamental of Corporate Finance

= -$650,000 +

$ 325,000 $ 325,000 $ 325,000
+
+

1.175
1.1752
1.1753

≈ $62,337.343

10.2 Net present value: Kingston, Inc. management is considering purchasing a new machine at a cost of
$4,133,250. They expect this equipment to produce cash flows of $814,322, $863,275, $937,250,
$1,017,112, $1,212,960, and $1,225,000 over the next six years. If the appropriate discount rate is 15
percent, what is the NPV of this investment?
Solution:
NPV = NCF0 +

NCF 1 NCF 2 NCF 3 NCF 4 NCF 5 NCF 6
+
+
+
+
+
(1+k ) ( 1+ k )2 ( 1+ k )3 ( 1+k )4 ( 1+k )5 ( 1+ k )6

= -$4,133,250 +

$ 814,322 $ 863,275 $ 937,250 $ 1,017,112 $ 1,212,960 $ 1,225,000
+
+
+
+
+
1.15

1.152
1.153
1.154
1.155
1.156
≈ - $441,933.015

10.3 Net present value: Crescent Industries management is planning to replace some existing machinery
in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying
table. If the firm uses an 18 percent discount rate for projects like this, should management go ahead
with the project?

Solution:
NPV = NCF0 +

NCF 1 NCF 2 NCF 3 NCF 4
+
+
+
(1+k ) ( 1+ k )2 ( 1+k )3 ( 1+ k )4

= -$3,300,000 +

$ 875,123 $ 966,222 $ 1,145,000 $ 1,250,399
+
+
+
2
3
4

1.18
1.18
1.18
1.18

= -$522,620.5
Management should not go ahead with this project because NPV < 0.

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Fundamental of Corporate Finance
10.4 Net present value: Management of Franklin Mints, a confectioner, is considering purchasing a new
jelly bean-making machine at a cost of $312,500. They project that the cash flows from this investment
will be $121,450 for the next seven years. If the appropriate discount rate is 14 percent, what is the NPV
for the project?
Solution:
n=7

NPV = NCF0 + ∑
1

NCF n
n

( 1+ k )
7

= -$312,500 + ∑
n =1

$ 121,450
n
1.14

≈ $208,314.623

10.5 Net present value: Blanda Incorporated management is considering investing in two alternative
production systems. The systems are mutually exclusive, and the cost of the new equipment and the
resulting cash flows are shown in the accompanying table. If the firm uses a 9 percent discount rate for
production system projects, in which system should the firm invest?

Solution:
System 1:
NPV1 = NCF0 +

NCF 1 NCF 2 NCF 3
+
+
(1+k ) ( 1+ k )2 ( 1+ k )3

= -$15,000 +

$ 15,000 $ 15,000 $ 15,000
+
+
≈ $22,969.42
1.09

1.092
1.09 3

System 2:
NPV2 = NCF0 +

NCF 1 NCF 2 NCF 3
+
+
(1+k ) ( 1+ k )2 ( 1+ k )3

= -$45,000 +

$ 32,000 $ 32,000 $ 32,000
+
+
2
3
1.09
1.09
1.09

≈ $36,001.43

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Fundamental of Corporate Finance

The firm should invest in system 2 because NPV 2 > NPV1.

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