Q6. The financial manager at Genesis Company is looking into the purchase of an apartment complex for $550,000. Net after-tax cash flows are expected to be $65,000 for each of the next five years, then drop to $50,000 for four years. Genesis’ required rate of return is 9% on projects of this nature. After nine years, Genesis Company expects to sell the property for after-tax proceeds of $300,000. What is the respective internal rate of return (IRR) and net present value (NPV) on this project?

A)   13.99%; $166,177.

B)   6.66%; −$64,170.

C)   7.01%; −$53,765.

Q7. Calabash Crab House is considering an investment in mutually exclusive kitchen-upgrade projects with the following cash flows:

                          Project A       Project B

Initial Year       -$10,000       -$9,000

Year 1              2,000             200

Year 2              5,000             -2,000

Year 3              8,000             11,000

Year 4              8,000             15,000

Assuming Calabash has a 12.5% cost of capital, which of the following investment decisions is most appropriate?

A)   Accept Project A because its internal rate of return is higher than that of Project B.

B)   Accept both projects because they both have positive net present values.

C)   Accept Project B because its net present value is higher than that of Project A.

答案和详解如下：

Q6. The financial manager at Genesis Company is looking into the purchase of an apartment complex for $550,000. Net after-tax cash flows are expected to be $65,000 for each of the next five years, then drop to $50,000 for four years. Genesis’ required rate of return is 9% on projects of this nature. After nine years, Genesis Company expects to sell the property for after-tax proceeds of $300,000. What is the respective internal rate of return (IRR) and net present value (NPV) on this project?

A)   13.99%; $166,177.

B)   6.66%; −$64,170.

C)   7.01%; −$53,765.

Correct answer is C)

IRR Keystrokes: CF₀ = -$550,000; CF₁ = $65,000; F₁ = 5; CF₂ = $50,000; F₂ = 3; CF₃ = $350,000; F₃ = 1.

NPV Keystrokes: CF₀ = -$550,000; CF₁ = $65,000; F₁ = 5; CF₂ = $50,000; F₂ = 3; CF₃ = $350,000; F₃ = 1.

Compute NPV, I = 9.

Note: Although the rate of return is positive, the IRR is less than the required rate of 9%.  Hence, the NPV is negative.

Q7. Calabash Crab House is considering an investment in mutually exclusive kitchen-upgrade projects with the following cash flows:

                          Project A       Project B

Initial Year       -$10,000       -$9,000

Year 1              2,000             200

Year 2              5,000             -2,000

Year 3              8,000             11,000

Year 4              8,000             15,000

Assuming Calabash has a 12.5% cost of capital, which of the following investment decisions is most appropriate?

A)   Accept Project A because its internal rate of return is higher than that of Project B.

B)   Accept both projects because they both have positive net present values.

C)   Accept Project B because its net present value is higher than that of Project A.

Correct answer is C)

When net present value (NPV) and internal rate of return (IRR) give conflicting project rankings, NPV is the most appropriate method for deciding between mutually exclusive projects. Here, the NPV of project A is $6,341 and the NPV of Project B is $6,688. Both NPVs are positive, so Calabash should select the Project B because of its higher NPV.

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