Cash Flow Writing Assignments: Projects With Positive NPV

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You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 7 percent? What if the discount rate is 10 percent?
At 7 % the NPV for project A is cash inflows – cash outflows, ($ 360,000* 0.8163) - $275,0000= $18,868
Project B, NPV= $113,600*0.0.9346+ ($81,900*0.8734) + ($47,000*0.8163) - $202,000= $14,068
At 10 % NPV project A= ($360,000*0.7513) - $ 360,000= ($4,532)
NPV Project B = ($116,600*0.9091) + ($81,900*0.8264) + ($47,000*0.7513) - $202,000= $4,267
* At 7% choose Project A with higher NPV
* At 10% choose project B with higher NPV
1 Radiology Associates is considering an investment which will cost $259,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $58,000. This inflow will increase to $150,000 and then $200,000 for the following two years before ceasing permanently. The firm requires a 14 percent rate of return and has a required discounted payback period of three years. Accept or reject this project? Why? 

Year

Project A

PVIF at 14%

Discounted CF

0

($259,000)

1

($259,000)

1

0

0.8772

$0

2

58,000

0.7695

$44,631

3

150,000

0.675

$101,250

4

200,000

0.5921

$118,420








$5,301

NPV is ($259,000) + $58,000/(1.14)-^2+ $150,000/ (1.14- ^3+ $200,000/ (1.14- ^4)= $5301
Decision criteria accept projects with positive NPV, and hence Radiology Associates should accept the project
2 You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate?


Project A

Project B


Year

Cash flow

Cash flow

Incremental CF

0

($80,300)

($77,900)

($2,400)

1

$25,000

$25,000

$0

2

$14,000

$13,000

($1,000)

3

$47,800

$46,000

($1,800)

-2.4x 3+ x2+ x+1.8=0
This is the same as -24x 3+ 10x+1.8=0 and x= -1.06022=6.022%
Crossover rate=x-1= 1.06022-1=0.06022 and the NPV is ($4,156.39)
Crossover rate= 6.022%
3 A proposed project lasts 3 years and has an initial investment of $500,000. The after tax cash flows are estimated at $120,000 for year 1, $240,000 for year 2, and $240,000 for year 3. The firm has a target debt/equity ratio of 0.6. The firm’s cost of equity is 15% and its cost of debt is 8%. The tax rate is 35%. What is the NPV of this project? (hint: remember that the D/E is saying that debt is 60% of equity. In other words, you ...