Kase Company can invest in each of three cheese-making projects: C1, C2, and C3.

Question

Kase Company can invest in each of three cheese-making projects: C1, C2, and C3. It requires a 12% return from its investments. Each project requires an initial investment of $190,000 and would yield the following annual cash flows. (Use Table B.1, Table B.3)

  

Calculate net present value of project C1. (Round "PV Factor" to 4 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

  

  

Calculate net present value of project C2. (Round "PV Factor" to 4 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

  

  

Calculate net present value of project C3. (Round "PV Factor" to 4 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

  

  

Calculate the internal rate of return for project C2. (Round "PV Factor" to 4 decimal places. Round your percent value to a whole number. Omit the % sign in your response.)

  

Kase Company can invest in each of three cheese-making projects: C1, C2, and C3. It requires a 12% return from its investments. Each project requires an initial investment of $190,000 and would yield the following annual cash flows. (Use Table B.1, Table B.3)

C1 C2 C3   Year 1 $ 10,000 $ 80,000 $ 150,000   Year 2 90,000 80,000 50,000   Year 3 140,000 80,000 40,000      Totals $ 240,000 $ 240,000 $ 240,000   

  

(1.1)

Calculate net present value of project C1. (Round "PV Factor" to 4 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

  

  Net present value $   

  

(1.2)

Calculate net present value of project C2. (Round "PV Factor" to 4 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

  

  Net present value $   

  

(1.3)

Calculate net present value of project C3. (Round "PV Factor" to 4 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

  

  Net present value $   

  

(1.4) Identify which projects, if any, should be acquired. C1 and C3 C1 and C2 C2 and C3 none

(3)

Calculate the internal rate of return for project C2. (Round "PV Factor" to 4 decimal places. Round your percent value to a whole number. Omit the % sign in your response.)

  

  Internal rate of return for project C2 %  

Kase Company can invest in each of three cheese-making projects: C1, C2, and C3. It requires a 12% return from its investments. Each project requires an initial investment of $190,000 and would yield the following annual cash flows. (Use Table B.1, Table B.3) Calculate net present value of project C1. (Round "PV Factor" to 4 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Calculate net present value of project C2. (Round "PV Factor" to 4 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Calculate net present value of project C3. (Round "PV Factor" to 4 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.) Identify which projects, if any, should be acquired. Calculate the internal rate of return for project C2. (Round "PV Factor" to 4 decimal places. Round your percent value to a whole number. Omit the % sign in your response.)

Explanation / Answer

1.1 NPV of C1 = present value of cash inflows - present value of cash outflow

= 10000 * present value factor ( 12% , 1 years) + 90000 * present value factor ( 12% , 2 years) +

140000 * present value factor ( 12% , 3 years) - 190000

= 10000 * 0.8929 + 90000*0.7972 + 140000*0.7118 - 190000

= 8929 + 71748 + 99652 - 190000

= - 9671

1.2 NPV of C2 = present value of cash inflows - present value of cash outflow

= 80000 * present value factor of annuity ( 12% , 3 years) - 190000

= 80000 * 2.4018 - 190000

= 2144

1.3 NPV of C3 = present value of cash inflows - present value of cash outflow

= 150000 * 0.8929 + 50000 * 0.7972 + 40000 * 0.7118 - 190000

= 133935 +39860 + 28472 - 190000

= 12267

1.4 projects C2 and C3 should be acquired as they are giving positive npv. option C

(3) IRR for C2 is rate at which NPV is zero

present value of cash inflows = present value of cash outflow

80000 * present value factor of annuity = 190000

present value factor of annuity = 190000 / 80000 = 2.375 ( lies between rate of 12% to 15% from table)

We can intrapolate between 12% and 15% to get 12.66% as the exact answer

So answer is 12 ( as per the requirements of the question)

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