Exercise 19.15 Advanced Technology, Payback, NPV, IRR, Sensitivity Analysis Gina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: Decreased waste Increased quality $300,000 400,000 600,000 Decrease in operating costs Increase in on-time deliveries 200,000 The system will cost $9,000,000 and last 10 years. The company's cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? Calculate the NPV and IRR for the project. Should the system be purchased_even if it does not meet the payback criterion? 2. 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of $1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of $300,000. Recalculate the payback period, NPV, and IRR given this new infor- mation. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the company's decision? OBJECTIVE 23

Question 2 A firm is considering an investment project that has a cost of $1 million and is expected to generate an annual after-tax cash flow of $250,000 for five years. It has already spent $25,000 in research and development (R&D) costs for the project. If the firm's required rate of return is 14 percent and consider R&D a sunck cost, what is the NPV of this project? A $25,000 B -$141,750 C +141,750 D $858,250

# 30 Investment Criteria A new furnace for a small factory will cost $27,00 a year to install and will require ongoing maintenance expenditures of $1,500 a year. But it is far more fuel efficient than the old one and will reduce the compounding of heating oil by 2400 gallons per year. Heating oil this year will cost $3.00 per gallon; the price per gallon is expected to increase by .50 per year for the next 3 years and stabilize for the foreseeable future. The furnace will last for 20 years at which point it will need to be replaced and will have no salvage value. The discount rate id 8 %. What is the NPV of the investment in the furnace? What is the IRR? What is the payback period?

#27 * Finding the Internal Rate of Return (IRR) of an Investment:  A company is considering buying a new piece of machinery that costs $8M and has a salvage value of $1.5M at the end of its 10-year useful life.  The machinery nets $2.3M per year in annual revenues.  MARR = 10%.  The internal rate of return (IRR) on this investment is approximately _____________.   A. 26% B. 31% C. 19% D. 16%

Question 21 Petram is a company that manufactures aircraft parts. The company is considering various investment projects that may improve operational efficiency, and has already spent £30,000 gathering relevant data. It has now shortlisted three projects and asked you to recommend the best option. You have been provided with the following information about the projects: - Project I will last for 4 years. The initial outlay is £950,000 and the forecast operating cash inflow from the project is £350,000 for the first 2 years, £425,000 in year 3 and £150,000 in the last year. Annual depreciation expense associated with this project is £237,500. - Project II will last for 4 years. The initial outlay is £1,150,000 and the forecast operating cash inflow from the project is £550,000 in the first year and £350,000 for the following three years. Annual interest expense associated with this project is £45,000. - Project III will last for 4 years. The initial outlay is £850,000 and the forecast…

Problem #4: Budgets "UMPI Inc. is considering the purchase of a street paver machine for $225,000. The expected life of the machine will be three years, and it will have a salvage value of $25,000. Annual maintenance costs will total $7,500. Annual savings are predicted to be $92,500. The company's required rate of return is 8%. Ignoring the TVM, calculate the net cash inflow or outflow resulting from this investment opportunity. Be sure to prepare a schedule that clearly depicts the time frame of the cash flows. 1) Using the Present Value Factors for $1 at 8% noted above (table provided for reference), calculate the net present value of this investment (ignoring taxes) 2) Based on your answer in requirement 1: should UMPI purchase the street paver machine. Factors: Present Value of $1 (r=8%) Year 0 1.0000 Year 1 0.9259 Year 2 0.8573 Year 3 0.7938