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Question Description

1) W4DQ1-CLO4

What is meant by each of the following statements?

a)”The present value of the future cash flows expected from an investment project is $20,000,000.”

b)”The net present value (NPV) of an investment project is $10,000,000.”

c)”A project’s cost of capital is 10 percent.”

2) W4DQ2-CLO4

A basketball player has just signed a $30 million contract to play for three years. She will receive $5 million as an immediate cash bonus, $5 million at the end of the first year, $8 million at the end of the second year, and the remaining $12 million at the end of the contract. Assuming a discount rate of 10 percent, what is the value of the package?

3) Answer the questions on the two following scenarios:

Perfect Color Company (PCC) is in the business of dyeing material. Business is booming, and PCC is considering buying a new color printer. Two printers are available on the market: printer X costs $50,000, requires $5,000 per year to operate, and has a useful life of two years; printer Y costs $60,000, requires $7,000 per year to operate, and will need to be replaced every three years. PCC’s cost of capital is 10 percent.

a)What are the present values of the total costs of the two printers over their useful life?

b)Why are the two present values not comparable?

c)What is the annual-equivalent cost for each of the printers?

d)Which printer should PCC purchase?

Pasta Uno is operating an old pasta-making machine that is not expected to last more than two years. During that time, the machine is expected to generate a cash inflow of $20,000 per year. It could be replaced by a new machine at a cost of $150,000. The new machine is more efficient than the current one and, as a result, is expected to generate a net cash flow of $75,000 per year for three years.The management

of Pasta Uno is wondering whether to replace the old machine now or wait another year. Pasta Uno’s cost of capital is 10 percent.

a)Assume that the current resale value of the old machine is zero and that the new machine will also have a zero resale value in the future. What is the annual-equivalent cash flow of using the new machine?

b)What should the management of Pasta Uno do? Explain by providing justification using concepts learned in lecture, textbook, and other resources as need. Your explanation should exhibit critical thinking.

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