1. You purchase machinery for $23, 958 that generates cash flow of $6,000 for five years. What is the internal rate of return on the investment?
2. The cost of capital for a firm is 10 percent. The firm has two possible investments with the following cash infolows:
Year 1 $300 200
2 200 200
3 100 200
a. Each investment costs $480. What investment (s) should the firm make according to net present value?
b. What is the internal rate of return for the two investments? Which investment (s) should the firm make? Is this the same answer you obtained in part a?
c. If the cost of capital rises to 14 percent, which investment (s) should the firm make?
3. A firm has the following investment alternatives:
&nb sp;A B C
Year 1 $ 1,100 $3,600 ___
2 1,100 ____ ____
&n bsp; 3 1,100 _____ $4,562
Each investment $3,000; investment B and C are mutually exclusive, and the firm’s cost of capital is 8 percent.
a. What is the net present value of each investment?
b. According to the net present values, which investment(s) should the firm make? why?
c. What is the internal rate of return on each investment?
d. According to the internal rates of return, which investment(s) should the firm make? why?
e. According to both the net present values and internal rates of return, which investments should the firm make?
f. If the firm could reinvest the $3,600 earned in year one from investment B at 10 percent, what effect would that information have on your answer to part e?
g. If the firm’s cost of capital had been 10 percent, what would be investment A’s internal rate of return
h. The payback method of capital budgeting selects which investment? Why?
4. The chief financial officer has asked you to calculate the net present values and internal rates of return of two $50,000 mutually exclusive investments with the following cash flows:
Project A Project B Cash Flow Cash flow
Year 1 $ 10,000 $ 0
2 &nbs p; 25,000 22,000
&nbs p; 3 30,000 48,000
If the firm’s cost of capital is 9 percent, which investment(s) would you recommend? Would your answer be different if the cost of capital were 14 percent?
7. An investment with total cost of $10, 000 will generate total revenues of $1,000 for one year. Management thinks that since the investment is profitable, it should be made. Do you agree? What additional information would you want? If funds cost 12 percent, what would be your advice to management? Would your answer be different if the cost of capital is 8 percent?
10. The financial manger has determined the following schedules for the cost of funds:
Cost of cost of equity
Debt ratio debt
0% 5% 13%
10% 5 13
20 5 13
30 5 13
40 5 14
50 6 15
60 8 16
a. determine the firm’s optimal capital structure
b. Construct a simple pro forma balance sheet that shows the firm’s optimal combination of debt and equity for its current level of assets.
Assts $500 debt ___
&nbs p; Equity ___
&nb sp; $500
C. An investment cost $400 and offers annual cash inflows of $133 for five years. Should the firm make the investment?
d. If the firm makes this additional investment, how should its balance sheet appear?
Assets ___ debt _____
& nbsp; Equity _____
E. if the firm is operating with its optimal capital structure and a $400 asset yields 20.0 percent, what return will the stockholders earn on their investment in the asset?
11) Investments quick and slow cost $1,000 each, are mutually exclusive, and have the following cash flows. The firm’s cost of capital is 10 percent.
Year 1 $ 1,300 $386
2 ____ 386
& nbsp; 3 ____ 386
a. According to the net present value method of capital budgeting, which investment(s) should the firm make?
b. According to the internal rate of return method of capital budgeting, which investment(s) should the firm make?
c. If q is chosen, the $1,300 can be reinvested and earn 12 percent. Does this information alter your conclusions concerning investing in q and s? To answer assume that S’s cash flows can be reinvested at its internal rate of return. Would you answer be different if S’s cash flows were reinvested at the cost of capital (10 percent).
3) a. What is the EOQ for a firm that sells 5,000 units when the cost of placing an order is $5 and the carrying? Costs are $3.50 per unit?
b. how long will the EOQ last? How many orders are placed annually?
c. As a result of lower interest rates, the financial manager determines the carrying cost are not $1.80 per unit. What are the new EOQ and annual number of objects?
4) given the following information
Annual sales in units 30,000
Cost of placing an order $60,000
Per unit carrying costs 1.50
Existing units of safety stock 300
a. What is the EOQ?
b. What is the average inventory based on the EOG and the existing safety stock?
c. What is the maximum level of inventory?
d. How many orders are placed each year?
14) what is the effective, compound rate of interest you earn if you enter into a repurchase agreement in which you buy a treasury bill for $76, 789 and agree to sell it after a month (30 days) for $77, 345? What is the compound rate of interest you pay if you sell a treasury bill for $76, 789 and repurchase it after 30 days for $77, 345?