1) The Absent Minded Profs have been hired as consultants for the BigCo Manufacturing Company.

BigCo is considering several projects and has provided the forecasted annual after tax cash flows in Table 1. Table 1 Annual cash flows (all amounts in $millions) Project Project A B Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -1,000 500 1,000 1,200 2,500 3,000 -2,000 1,500 1,000 300 500 200 Project Project Project Project C D E F -8,000 2,000 2,000 8,000 2,000 2,500 -5,000 4,800 1,000 6,000 -3,000 -4,000 -5,000 2,000 3,000 5,000 1,000 3,000 -10,000 3,000 2,000 1,000 1,000 3,000 Project G -3,000 1,500 1,200 300

Assume that BigCos cost of capital for all the projects is 7 percent. Calculate the NPV, IRR, Payback period, Discounted Payback and Profitability index for each project in Table 1. The firm requires a payback period of 2 years and a discounted payback period of 2.5 years.

2) The BigCo Manufacturing Company is also debating whether to invest in Project G (a three year project) with Project D. Determine which project is preferred (assuming the appropriate cost of capital is 7 percent)

3) What is the NPV for a project with an after-tax initial investment of $17,000 and five equal cash flows of $8,000 at the start of each year, beginning with the third year? The appropriate discount rate is 20 percent. Should it be accepted or not?

4) What is the IRR of the following project? After-tax initial investment = $6,000; CF1 = $2,500; CF2 = $4,000; CF3 = $5,000. If k = 20%, should you accept the project?

5) Calculate the crossover rate for projects B and C from Table below Project Annual cash flows Project B Initial investment Year 1 Year 2 Year 3 Year 4 Year 5 Project C

-$2,000 1500 1000 300 500 200

-$8,000 2,000 2,000 8,000 2,000 2,500

6) SK Inc. has two projects as follows:

Projects A B

Initial CF CF1 2,500 3,000 800 750

CF2 1,200 1,500

CF3 900 1,000

CF4 2,000 4,000

If SK set 2.6 years as a cut-off period for screening projects, which projects will be selected, using the discounted payback period method?

7) MedCo is a large manufacturing company, currently uses a large printing press in its operations and is considering two replacements: the PDX341 and PDW581. The PDX costs $500,000 and has annual

maintenance costs of $10,000 for the first 5 years and $15,000 for the next 10 years. After 15 years, the PDX will be scrapped (salvage value is zero). In contrast the PDW can be acquired for $50,000 and requires maintenance of $30,000 a year for its 10 year life. The salvage value of the PDW is expected to be zero in 10 years. Assuming that MedCo must replace their current printing press (it has stopped functioning), has a 10 percent cost of capital and all cash flows are after tax, which replacement press is the most appropriate? 8) A project has an NPV of $50,000. Calculate the cost of capital of this project if it generates the following cash flows for 6 years after an initial investment of $200,000: Year 1: $50,000 Year 2: $50,000 Year 3: $30,000 Year 4: $80,000 Year 5: $60,000 Year 6: $70,000 9) Based on the cash flows given below, calculate the PI of a project that has a required rate of return of 15 percent. Also, indicate whether the project should be accepted. Year 0: -$90,000 Year 1: $20,000 Year 2: $40,000 Year 3: -$15,000 Year 4: $100,000 10) Gis Inc now has the following two projects available:

Projects #1

After-tax Initial CF CF1 12,095 5,500

After-tax CF2 6,000

After-tax CF3 9,500

#2

3,080

3,450

3,000

Assume that Rf = 5%, risk premium = 10%, beta = 1.2. Determine which project(s) Gis Inc. should choose if they are mutually exclusive.