Financial management course

1. Tutorial 4
1) DYI Construction Co. is considering a new inventory system that will cost $750,000. The
system is expected to generate positive cash flows over the next four years in the amounts of
$350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four.
DYI's required rate of return is 8%. What is the internal rate of return of this project?
A) 10.87%
B) 11.57%
C) 13.68%
D) 15.13%
2) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000
and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs
$120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year
three, and $45,000 in year four. The firm's required rate of return for these projects is 10%. The
net present value for Project A is
A) $12,358.
B) $16,947.
C) $19,458.
D) $26,074.
3) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000
and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs
$120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year
three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%.
The profitability index for Project A is
A) 1.27.
B) 1.22.
C) 1.17.
D) 1.12.
4) Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000
and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs
$120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year
three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%.
The internal rate of return for Project A is
A) 31.43%.
B) 29.42%.
C) 25.88%.

2. D) 19.45%.
5)
Initial Outlay
Cash Flow in
Period 1
Cash Flow in
Period 2
Cash Flow in
Period 3
Cash Flow in
Period 4
$4,000,000 $1,546,170 $1,546,170 $1,546,170 $1,546,170
The Internal Rate of Return (to nearest whole percent) is
A) 10%.
B) 18%.
C) 20%.
D) 24%.
1 2 3 4 5
D D A B C
6) Kingston Corp. is considering a new machine that requires an initial investment of $480,000
installed, and has a useful life of 8 years. The expected annual after-tax cash flows for the
machine are $89,000 for each of the 8 years and nothing thereafter.
a. Calculate the net present value of the machine if the required rate of return is 11 percent.
b. Calculate the IRR of this project.
c. Should Kingston accept the project (assume that it is independent and not subject to any
capital rationing constraint)? Explain your answer.
Answer:
a. NPV = ($21,995) From Excel Spreadsheet NPV function with rate = .11, cash flows as given,
and then subtracting the initial investment of $480,000.
b. IRR = 9.7%.
c No, the projects NPV is negative and the IRR is less than the required rate of return.

3. Acceptance of this project would reduce shareholder value.
7) A project that requires an initial investment of $340,000 is expected to have an after-tax cash
flow of $70,000 per year for the first two years, $90,000 per year for the next two years, and
$150,000 for the fifth year? Assume the required return for this project is 10%.
a. What is the NPV of the project%?
b. What is the IRR of the project?
d. What is the PI of the project?
e. What decision would you make regarding this project if the required rate of return is 10%?
a. NPV = $3,715.34
b. IRR = 10.38%
d. PI = 1.011
e. Accept the project because its NPV is positive, or because its IRR and MIRR are greater than
the required return of 10%, or because the PI is greater than 1.