FIN-350 Module 8 Practice Problems – From chapter in the textbook

FIN-350 Module 8 Practice Problems – From chapter in the textbook

Fundamentals of Business Finance – Capital Budgeting and Capital Investment Decision Making

Grand Canyon University

Textbook: Principles of Managerial Finance (14th Edition)

Complete the following problems from chapter 10 in the textbook:

P10-4 – Long-term investment decision, payback method

P10-10 – NPV-Mutually exclusive projects

P10-11 – Long-term investment decision, NPV method

P10-15 – Internal rate of return

P10-21- All techniques, conflicting rankings

P10-24 – All techniques- Decision among mutually exclusive investments

P10–4

Long-term investment decision, payback method Bill Williams has the opportunity to invest in project A that costs $9,000 today and promises to pay annual end-ofyear payments of $2,200, $2,500, $2,500, $2,000, and $1,800 over the next 5 years. Or, Bill can invest $9,000 in project B that promises to pay annual end-of-year payments of $1,500, $1,500, $1,500, $3,500, and $4,000 over the next 5 years.

a. How long will it take for Bill to recoup his initial investment in project A?

b. How long will it take for Bill to recoup his initial investment in project B?

c. Using the payback period, which project should Bill choose?

d. Do you see any problems with his choice?

P10-10

NPV—Mutually exclusive projects Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration. The relevant cash flows associated with each are shown in the following table. The firm’s cost of capital is 15%.

P10-11

Long-term investment decision, NPV method Jenny Jenks has researched the financial pros and cons of entering into an elite MBA program at her state university. The tuition and needed books for a master’s program will have an upfront cost of $100,000. On average, a person with an MBA degree earns an extra $20,000 per year over a business career of 40 years. Jenny feels that her opportunity cost of capital is 6%. Given her estimates, find the net present value (NPV) of entering this MBA program. Are the benefits of further education worth the associated costs?

P10-15

Internal rate of return. Peace of Mind, Inc. (PMI), sells extended warranties for durable consumer goods such as washing machines and refrigerators. When PMI sells an extended warranty, it receives cash up front from the customer, but later PMI must cover any repair costs that arise. An analyst working for PMI is considering a warranty for a new line of big-screen TVs. A consumer who purchases the 2-year warranty will pay PMI $200. On average, the repair costs that PMI must cover will average $106 for each of the warranty’s 2 years. If PMI has a cost of capital of 7%, should it offer this warranty for sale?………………………………