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**Question 1:** (10 points). (Net
present value calculation) Dowling Sportswear is considering building a new
factory to produce aluminum baseball bats. This project would require an
initial cash outlay of $4,000,000 and would generate annual net cash inflows of
$900,000 per year for 7 years. Calculate the project’s NPV using a discount
rate of 5 percent. (Round to the nearest dollar.)

a. If the discount rate is 5 percent, then the project’s NPV is: | $ |

**Question 2:** (30 points). (Net present value calculation)
Big Steve’s, makers of swizzle sticks, is considering the purchase of a new
plastic stamping machine. This investment requires an initial outlay of $90,000
and will generate net cash inflows of $19,000 per year for 11 years. To answer Orange item questions, keep the text that is the
best answer.

a. What is the project’s NPV using a discount rate of 7 percent? (Round to the nearest dollar.)

If the discount rate is 7 percent, then the project’s NPV is: | $ |

Should the project be accepted?

The project | should be or should not be | accepted because the NPV is | ||||

positive or negative | and therefore | adds or subtracts | value to the firm. | |||

b. What is the project’s NPV using a discount rate of 16 percent?

If the discount rate is 16 percent, then the project’s NPV is: | $ |

Should the project be accepted? Why or why not?

c. What is this project’s internal rate of return? (Round to two decimal places.)

This project’s internal rate of return is: | % |

Should the project be accepted? Why or why not?

If the project’s required discount rate is 7%, then the project | should be or should not be | ||

accepted because the IRR is | higher than or lower than | the required discount rate. | |

If the project’s required discount rate is 16%, then the project | should be or should not be | ||

accepted because the IRR is | higher than or lower than | the required discount rate. | |

**Question 3:** (15 points). (Related
to Checkpoint 11.2) (Equivalent annual cost calculation) Barry Boswell is a
financial analyst for Dossman Metal Works, Inc. and he is analyzing two
alternative configurations for the firm’s new plasma cutter shop. The two
alternatives that are denoted A and B below perform the same task and although
they each cost $95,000 to purchase and install they offer very different cash
flows. Alternative A has a useful life of 7 years whereas Alternative B will
only last for 3 years. The after-tax cash flows from the two projects are as
follows:

a. Calculate each project’s equivalent annual cost (EAC) given a discount rate of 10 percent. (Round to the nearest cent.)

a. Alternative A’s equivalent annual cost (EAC) at a discount rate of 10% is: | $ |

b. Alternative B’s equivalent annual cost (EAC) at a discount rate of 10% is | $ |

b. Which of the alternatives do you think Barry should select? Why? (Select the best choice below.)

- This cannot be determined from the information provided.
- Alternative B should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative A.
- Alternative A should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative B.
- Alternative A should be selected because it has the highest NPV.

**Question 4:** (10 points). (IRR calculation) What
is the internal rate of return for the following project: An initial outlay of
$9,000 resulting in a single cash inflow of $15,424 in 7 years. (Round to the
nearest whole percent.)

a. The internal rate of return for the project is: | % |

**Question 5:** (10 points). (IRR calculation) Jella
Cosmetics is considering a project that costs $750,000 and is expected to last
for 9 years and produce future cash flows of $180,000 per year. If the
appropriate discount rate for this project is 17 percent, what is the project’s
IRR? (Round
to two decimal places.)

a. The project’s IRR is: | % |

**Question 6:** (10 points) (IRR,
payback, and calculating a missing cash flow) Mode Publishing is considering a
new printing facility that will involve a large initial outlay and then result
in a series of positive cash flows for four years. The estimated cash flows
associated with this project are:

If you know that the project has a regular payback of 2.9 years, what is the project’s internal rate of return?

a. The IRR of the project is: | % |

**Question 7:** (15 points) (Mutually
exclusive projects and NPV) You have been assigned the task of evaluating two
mutually exclusive projects with the following projected cash flows:

If the appropriate discount rate on these projects is 11 percent, which would be chosen and why? (Round to the nearest cent.)

a. The NPV of Project A is: | $ |

b. The NPV of Project B is: | $ |

Which project would be chosen and why? (Select the best choice below.)

- Cannor choose without comparing their IRRs.
- Choose A because its NPV is higher.
- Choose both because they both have positive NPVs.
- Choose B because its NPV is higher.