1. Growth Enterprises believes its latest project, which will cost $88,000 to in

Question

1. Growth Enterprises believes its latest project, which will cost $88,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of the first year will be $7,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5%. What is the project IRR?

2. A precision lathe costs $26,000 and will cost $36,000 a year to operate and maintain. If the discount rate is 10% and the lathe will last for 5 years, what is the equivalent annual cost of the tool?

3. Project A has the following the cash flows:
Year CF
0              -$200
1                $80
2    $80
3                $80

4                $80

What is the profitability index if the OCC is 11%?

4. Project A has the following the cash flows:
Year CF
0              -$200
1                $80
2    $80
3                $80

4                $80

What is the discounted payback period if the OCC is 11%?

5. A firm can lease a truck for 4 years at a cost of $30,000 annually. It can instead buy a truck at a cost of $80,000, with annual maintenance expenses of $10,000. The machine lasts four years. The discount rate is 10%. It's better to lease instead of buying the machine.

Explanation / Answer

discounted payback

Cumulative value of inflows discount factor PV

1. 80 0.90 72

2. 160 0.81 129.6

3. 240 0.73 175.2

4. 320 0.66 211.2

dicounted paybck=3year+[(200-175.2)/(211.2-175.2)]*12=3year 8 month

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