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%.