Question

Your answer: Question 3 (CHAPTER 10) Your boss is considering a 5-year investment project. If the project is accepted, it would require an immediate spending of $796 to buy all necessary production equipment. This equipment would be sold at the end of the project and bring your company estimated $120 in after-tax sale proceeds. Your boss's consulting team estimated that the annual after-tax profits (or operating cash flows) would equal $165. The team also recommends immediately setting aside $49 in cash to cover any unforeseen expenses. The required annual rate of return is 9.1%. Your answer: Calculate the Net Present Value of this proposed investment project. (Do NOT use"" in your answer. Increase decimal places for any intermediate calculations, from the default 2 to 6 or higher. Only round your answer to TWO decimal places. For example, 1,000.23 or -1,000.23) Question 4 (CHAPTER 9) Here's what's known about this investment opportunity: Today: the company would need to invest $450,000 In 1 year: the company would receive a profit of $100,000 In 2 years: the company would receive a profit of $300,000 In 3 years: the company would receive a profit of $300,000 In 4 years: the company would receive a profit of $100,000 The required return is 17%. After doing all sorts of calculations and analyses, the company made the following several conclusions. Which ones are CORRECT and which ones are INCORRECT? (1) (Increase decimal places for any intermediate calculations, from the default 2 to 6 or higher. Only round your final answer to TWO decimal places: for example, 1.23.) The Profitability Index of this investment opportunity equals 1.21. (2) For an investment with the Profitability Index of 1.21, "reject" is the right decision

Answer 1

First Question Annual Operating Cash Flow	165
PVAF(9.1%,5years)	$3.88
PV of Cash Flow (a)	$640.13
Salvage value of equipment	120
PVF(9.1%,5years)	0.646958
PV of Salvage Value (b)	77.63499
Working Capital Recovered	49
PV of Working Capital Recovered ©	31.70095
PVCI (a+b+c)		$749.47
Less
Cost of the Equipment	-796
Working Capital Invested	-49	-845
NPV		($95.53)

Second Question

CI	PVF	PVCI
100000	0.854700855	85470.09
300000	0.730513551	219154.1
300000	0.624370556	187311.2
100000	0.533650048	53365
	Total PVCI	545300.3
Less	Investment	-450000
	NPV	95300.32
	PI (Total PVCI/PVCO)	1.211778

! - Correct - As shown above the PI is 1.21

2. Incorrect - If PI is more that 1, the project should be accepted so "accept" is the right decision

3. Correct - PI of 1.21 shows the investment is less than the PV of future benefits

4 Incorrect - The PI of 1.21 shows that the PV of future cash flows will be 1.21 times of the amount invested. In absolute terms, the NPV can be of any amount, but it will be positive.