Net Present Value Problems

1.  Johnson Company is considering two mutually exclusive projects, each of which requires an initial investment of $80,000.  The cash flows of the two projects are as follows:

Year

Project A

Project B

1

$0

$40,000

2

$0

$40,000

3

$25,000

$25,000

4

$40,000

$0

5

$40,000

$0

Cost of Capital is 8%. Compute the NPV of the two projects.  Which one is more desirable? Why?

2.  Mountainview City is contemplating the purchase of a large mainframe computer system. The computer system would require a payment now of $100,000; the software to run the computer would be an additional $40,000.  The computer system would save the City a total of $32,000 per year over its 5-year life.  A system upgrade would be required in year 3 at a cost of $22,000.  At the end of the 5-year period, the computer could be sold for a salvage value of $15,000.Spare computer time on the machine would generate time-sharing revenue of $10,000 per yearin years 1-5.  The City uses a cost of capital of 8%.  Compute the NPV of the project.  Is it acceptable?

3.  Jefferson Airport is contemplating the construction of a longer runway.  The relevant costs for this project are as follows.  The cost of the additional land for the runway would be $70,000. The runway construction would cost $200,000.  The cost to extend the perimeter fence would be $30,000.  Runway lights will cost $40,000.  Annual cost of maintaining the runway would be $28,000.  Due to the fact that larger planes could take off and land on this runway, additional annual revenue from landing fees would amount to $100,000.  Project life = 10 years.  The airport uses a cost of capital of 12%.  Compute the NPV for the project.  Would it be acceptable?

4.  The management of Delaware National Bank is considering an investment in automatic teller machines.  The machines would cost $124,000 and have a useful life of 7 years.  The bank's controller has estimated that the automatic teller machines will save the bank $27,000 each year.  At the end of the seventh year, the machines can be sold at a $10,000 salvage value. The bank uses a 10% cost of capital.  Compute the NPV.  Is the investment acceptable?

5.  Adams County is considering the purchase of a site for a new sanitary landfill. The purchase price for the site is $195,000 and preparatory work will cost an additional $73,400.  The landfill would be usable for 10 years.  A consultant has indicated that the new landfill would produce savings of $40,000 per year, compared to the current landfill.  Adams County can borrow federal funds at a rate of 6%.  Compute the NPV for this project.  Is the project acceptable?

6.  The trustees of Community School of Art and Music are considering a major overhaul of the school's audio system.  If an overhaul is done now, the trustees expect to save money in repair costs--in year 1, the savings would be $3,000 and in year 2 the savings would be $5,000.  The cost of the overhaul is $6,664.  Compute the NPV for this investment.  Is the investment acceptable?  Use a cost of capital of 8%.