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Ziadat, Inc. is considering Project A and Project B, which are two mutually exclusively projects with unequal lives. Project A is an eight-year project that has an initial outlay or cost of $140,000. Its future cash inflows for years 1 through 8 are the same at $36,500. Project B is a six-year project that has an initial outlay or cost of $160,000. Its future cash inflows for years 1 through 6 are the same at $48,000. Ziadat uses the equivalent annual annuity (EAA) method and has a discount rate of 13%. Which project(s), if any, will Ziadat accept?

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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Acme, Inc. is considering a four-year project that has an initial outlay or cost of $100,000. The respective future cash inflows from its project for years 1,2,3 and 4 are: $50,000, $40,000, $30,000 and $20,000. Will it accept the project if its payback period is 31 months?

Your company is considering starting a project in either Germany or the U.S. - and are mutually exclusive.

German project is a 6 year project with the following expected cash flows:

Year 0 = -$650,000

Year 1 = 220,000

Year 2 = 240,000

Year 3 = 245,000

Year 4 = 270,000

Year 5 = 120,000

Year 6 = 100,000

U.S. project is a 3 year project; however the company plans to repeat the project after 3 years. The expected cash flows are:

Year 0 = -$530,000

Year 1 = 280,000

Year 2 = 290,000

Year 3 = 310,000

Due to the project unequal lives, use the annual annuity approach to evaulate them, the approprite cost of capital for both project is 11%.

What is the NPV of the German project?

What is the NPV of the U.S. project?

What is the equivalent anual annuity (EAA) for the German project?

What is the EAA for the U.S. project?

If the CFO uses the EAA approach to decide which project to undertake, he should choose the German/U.S. project because it has the highest/lowest EAA.

ANSWER THE FOLLOWING: SHOW WORK

24) In a stream of past dividends, the initial dividend is $1.25 and the most recent dividend is $1.80. The
number of years between these two dividends (n) is 9 years. What is the average growth rate during this
seven-year period? Use a calculator to determine your answer.


25) Bacon Signs Inc., purchases a machine for $70,000. This machine qualifies as a five-year recovery asset
under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 =
19.20%; year 4 = 11.52%, etc. The firm has a tax rate of 34%. If the machine is sold at the end of two years for
$50,000, what is the cash flow from disposal?


26) Mulligan, Inc. is currently considering an eight-year project that has an initial outlay or cost of $140,000.
The cash inflows from its project for years 1 through 8 are the same at $35,000. Mulligan has a discount rate of
13%. Because there is a shortage of funds to finance all good projects, Mulligan wants to compute the
profitability index (PI) for each project. That way Mulligan can get an idea as to which project might be a better
choice. What is the PI for Mulligan's current project?


27) Find the Modified Internal Rate of Return (MIRR) for the following series of future cash flows, given a
discount rate of 11%: Year 0: -$22,000; Year 1: $5,000; Year 2: $6,000; Year 3: $9,000; Year 4: $7,500; and,
Year 5: $8,000.


28) Rogers' Rotors has debt with a market value of $250,000, preferred stock with a market value of $50,000,
and common stock with a market value of $750,000. If debt has before-tax cost of 7%, preferred stock a cost of
9%, common stock a cost of 11%, and the firm has a tax rate of 34%, what is the WACC?
A) 9.12% B) 8.64% C) 10.88% D) 9.39%


29) Geronimo, Inc. is considering a project that has an initial outlay or cost of $220,000. The respective future
cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $80,000, and $90,000,
respectively. Geronimo uses the internal rate of return method to evaluate projects. Will Geronimo accept the
project if its hurdle rate is 10%?
A) Geronimo will not accept this project because its IRR is about 6.50%.
B) Geronimo will not accept this project because its IRR is about 9.36%.
C) Geronimo will not accept this project because its IRR is about 8.70%.
D) Geronimo will not accept this project because its IRR is about 4.60%.


30) The initial outlay or cost for a four-year project is $1,000,000. The respective cash inflows for years 1, 2, 3
and 4 are: $500,000, $200,000, $300,000, $300,000. What is the discounted payback period if the discount rate
is 10%?
A) About 2.67 years B) About 3.35 years
C) About 4.50 years D) About 3.76 years

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