Chapter 6 Review Problems (cont.)

^[17] You are considering purchasing a home-based business that uses AI to create customized meal plans. You think that you can buy the business from the current owner for $120,000. You expect revenues of $40,000 per year. Your expenses are thought to be $20,000 per year for the first 2 years and $10,000 per year for the last 3 years. At the end of five years, you plan to sell the business, retire,e and move to Las Vegas. You anticipate you could sell it for $130,000. You want to earn at least 16% compounded annually on your investment?

(a) Calculate the payback for this project.

(b) Find the NPV. Should you buy the business?

(d) You think you might be overly optimistic in your estimate of the selling price of the business. What is the lowest selling price that you can accept and still be willing to buy the business? Round to the nearest $.

(e) Calculate the internal rate of return (IRR) for this investment. Should you buy the business?

(f) Your accountant tells you that your projected annual revenue is too high. What is the maximum annual decrease in revenue you could withstand and still have this investment be worthwhile?

^[18] You want to start up a business in a mall selling CFL souvenirs. You plan to spend $80,000 in start-up costs. You anticipate that you will break even in the first year and second year, make $20,000 the third, and make $20,000 each year after that. You plan to sell the business for $100,000 at the end of the sixth year. You want to earn at least 15% effective on your investment.

(a) What is the net present value of your business plan?

(b) What is the internal rate of return?

(d) You think you might be overly optimistic in your estimate of the selling price of the business. What is the lowest selling price that you can accept and still undertake the project? Round to the nearest dollar.

^[19] You are a restaurant owner and are considering expanding your business by buying the recently vacated store next door. The purchase price is $50,000. You will also need to spend an extra $35,000 on remodeling. The larger dining room is expected to generate net profits of $12,000 a year for the first 4 years and $15,000 a year for the next 6 years. At the end of 10 years, you will retire. You expect to be able to sell the restaurant for $70,000. You want to earn a minimum of 20% on your investment.

(a) What is the net present value?

(b) What is the Internal Rate of Return?

(d) You hear news reports that real estate prices may rise over the next few years and that this is especially true for commercial real estate. You now think you can sell the restaurant for more than $70,000. What is the minimum selling price you must have so that you would be willing to expand the restaurant? Round to the nearest $.

^[20] You have decided to start a business selling vitamin supplements. You estimate that you will have $200,000 in start-up costs. Annual expenses are expected to be $30,000, and revenue is expected to be $50,000 per year for the first 2 years and $75,000 in each of the next 3 years. You plan to sell the business at the end of 5 years for an estimated $250,000. You want to earn at least a 15% rate of return on your investment (MARR is 15%).

(a) Should you invest? What is the IRR?

(b) What is the NPV? Should you invest?

(c) Your accountant tells you that your estimated selling price is too high. What is the minimum selling price you could accept and still have this investment be worthwhile?

(d) One of the supplements you were going to sell has recently been banned. This will cause a substantial decrease in your revenue. What is the maximum annual decrease in revenue you could withstand and still have this investment be worthwhile?

^[21] You are operations manager for Flatugas, a small natural gas producer in the Peace River Region of British Columbia. You are considering investing in a new technology that captures more of the gas from the wellhead. The technology will cost $1,000,000, and operating costs are estimated at $25,000 per year, payable at the beginning of each year. The technology should result in $250,000 in extra natural gas revenue per year and have the added benefit of reducing greenhouse gas emissions. The technology is expected to last for 5 years, when it could be sold back to the manufacturer for a guaranteed price of $249,908.70. The company has a 15% MARR and requires a payback period of 4 years or less.

(a) What is the payback period of the investment? Should you invest?

(b) Calculate the IRR for the investment and explain how you would use IRR to make a decision on whether to invest or not.

(d) The director of finance reviews your analysis and tells you that a MARR of 13% is more appropriate for the project. He also informs you that the company should be able to sell clean air credits under the Paris agreement. What annual revenue would be required from the credits to make this a worthwhile investment at a 13% MARR? (Assume 5 equal payments at the end of the year).

^[22] The Blue Sky Resort plans to install a new chair lift to serve a new ski area. Construction of the lift is estimated to require an immediate outlay of $190,000. In addition, the company must spend $30,000 today and $30,000 per year for the next 3 years to clear and groom the new area. The life of the lift is estimated to be 11 years with a salvage value of $80,000. Profits from the lift (excluding the cost of grooming and clearing) are expected to be $40,000 per year for the first five years, and $70,000 per year for the next six years. The company wants to earn a minimum of 14% effective on the investment. All revenue occurs at the end of the year, and all expenses are paid at the beginning of the year.

(a) Determine the net present value. Should they go ahead with the project? Why or why not?

(b) Determine the internal rate of return. Should they go ahead with the project? Why or why not?

(d) You hear on the news that we might be in a recession for the next few years. You now wonder if your salvage value estimate of $80,000 is too high. What is the lowest salvage value you can accept and still undertake the project? Round to the nearest $.

^[23] A project is to cost $60,000 immediately and to produce net cash flows of $20,000 at the end of the first year, $30,000 at the end of the second year, and $25,000 at the end of the third year. At the end of the third year, the business will be sold for $5,000.

(a) If the company requires 15% effective, will it be able to achieve its goal?

(b) Find the value of the bonus paid at the start, which would cause the project to earn exactly 20% effective.

^[24] Due to a restricted capital budget, a company can undertake only one of the following 3-year projects. Both require an initial investment of $650,000 and will have no significant salvage value at the end. Project X is anticipated to have annual profits of $400,000, $300,000, and $200,000 in successive years, whereas Project Y’s only profit, $1.05 million, comes at the end of year three.

(a) Calculate the IRR of each project. On the basis of their IRRs, which project should be selected?

(b) On the basis of NPV, which project should be selected if the firm wants to earn at least 14% effective on their investment?

(c) On the basis of NPV, which project should be selected if the firm wants to earn at least 11% effective on their investment?

(source)

Easy Peasy All-in-One High School

An extension of Easy Peasy All-in-One Homeschool

Chapter 6 Review Problems (cont.)