1. Find the net present value (NPV) and profi tability index (PI) of a
project that costs $1,500 and returns $800 in year one and $850 in
year two. Assume the project’s cost of capital is 8 percent.
5. For the following projects, compute NPV, IRR, MIRR, PI, and
payback. If these projects are mutually exclusive, which one(s)
should be done? If they are independent, which one(s) should be
i. A B C D
Year 0 2 1,000 2 1,500 2 500 2 2,000
Year 1 400 500 100 600
Year 2 400 500 300 800
Year 3 400 700 250 200
Year 4 400 200 200 300
Discount rate 10% 12% 15% 8%
6. The Sanders Electric Company is evaluating two projects for
possible inclusion in the fi rm’s capital budget. Project M will
require a $37,000 investment while project O’s investment will be
$46,000. After-tax cash infl ows are estimated as follows for the two
YEAR PROJECT M PROJECT O
1 $12,000 $10,000
2 12,000 10,000
3 12,000 15,000
4 12,000 15,000
a. Determine the payback period for each project.
b. Calculate the NPV and PI for each project based on a 10
percent cost of capital. Which, if either, of the projects is
c. Determine the IRR and MIRR for Projects M and O.
10. A machine can be purchased for $10,500, including transportation
charges, but installation costs will require $1,500 more. The
machine is expected to last four years and produce annual cash revenues
of $6,000. Annual cash operating expenses are expected to be
$2,000, with depreciation of $3,000 per year. The fi rm has a 30
percent tax rate. Determine the relevant after-tax cash fl ows and
prepare a cash fl ow schedule.
11. Use the information in Problem 10 to do the following:
a. Calculate the payback period for the machine.
b. If the project’s cost of capital is 10 percent, would you
recommend buying the machine?
c Estimate the IRR for the machine.
3. Stern’s Stews, Inc., is considering a new capital structure. Its
current and proposed capital structures are the following:
Total assets $150 million $150 million
Debt 25 million 100 million
Equity 125 million 50 million
Common stock price $50 $50
Number of shares 2,500,000 1,000,000
Interest rate 12% 12%
Stern’s Stews’ president expects next year’s EBIT to be $20 million, but
it may be 25 percent higher or lower. Ignoring taxes, perform an EBIT/
eps analysis. What is the indifference level of earnings before interest
and taxes? Should Stern’s Stews change its capital structure? Why?
7. Here are the income statements for Genatron Manufacturing
Corporation for 2013 and 2014:
INCOME STATEMENT 2013 2014
Net sales $1,300,000 $1,500,000
Cost of goods sold 780,000 900,000
Gross profi t $520,000 $600,000
General and administrative 150,000 150,000
Marketing expenses 130,000 150,000
Depreciation 40,000 53,000
Interest 45,000 57,000
Earnings before taxes $155,000 $190,000
Income taxes 62,000 76,000
Net income $93,000 $114,000
Assuming one-half of the general and administrative expenses are fi xed
costs, estimate Genatron’s DOL, DFL, and DCL in 2013 and 2014.
8. The Nutrex Corporation wants to calculate its weighted average
cost of capital (WACC). Its target capital structure weights are 40
percent long-term debt and 60 percent common equity. The beforetax
cost of debt is estimated to be 10 percent and the company is in
the 40 percent tax bracket. The current risk-free interest rate is 8
percent on Treasury bills. The expected return on the market is 13
percent and the fi rm’s stock beta is 1.8.
a. What is Nutrex’s cost of debt?
b. Estimate Nutrex’s expected return on common equity using
the security market line (SML).
c. Calculate the after-tax weighted average cost of capital (WACC).
9. The following are balance sheets for the Genatron Manufacturing
Corporation for the years 2013 and 2014:
BALANCE SHEET 2013 2014
Cash $50,000 $40,000
Accounts receivable 200,000 260,000
Inventory 450,000 500,000
Total current assets 700,000 800,000
Fixed assets (net) 300,000 400,000
Total assets $1,000,000 $1,200,000
Bank loan, 10% $90,000 $ 90,000
Accounts payable 130,000 170,000
Accruals 50,000 70,000
Total current liabilities $270,000 $330,000
Long-term debt, 12% 300,000 400,000
Common stock, $10 par 300,000 300,000
Capital surplus 50,000 50,000
Retained earnings 80,000 120,000
Total liabilities and equity $1,000,000 $1,200,000
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