February 20, 2017

Homework Help: Finance

Posted by A on Sunday, November 4, 2007 at 8:58pm.

Question 1: You wish to start a project. Your initial investment is $100000. You generate 0 cash flows for the first 2 years but generate $16000 in year 3 and increase by 15% every year till year 7, after which time they decline by 2% until year 9. You expect 0 growth in cash flows beyond year 9, but expect to generate constant cash flows into the foreseeable future. If capital cost is 8% per year, find the NPV
ANSWER: Net Present Value=$168609.42

Question 2: You want to buy new machine and replace the existing machine, which you have used for the past 3 years. New machine costs $75000 and will be useful for 5 years after which can be sold to fetch salvage value of $9000. New machine will be depreciated straight-line to 0 over 5 years. Old machine was bought for $70000 and also depreciates straight-line to 0 over 5 years. Old machine can be sold today for $30000 but if you wait for 5 years, it will only worth $6500.
New machine is efficient. Annual savings in operating costs are $12000. Your net working capital requirement will decline annually by $4000. Tax rate is 35% and capital cost rate is 12%. Find the NPV
ANSWER: Net Present Value(replacing)=$9598.75

Please show me detailed step-by-step solutions. Thanks.

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