[9] Tessa Quaid has purchased a 10-year video rental franchise for $12,000. She will have to invest another $22,000 in the store immediately. She expects returns of $8,000 a year at the end of each year. Will TQ make a rate of return of at least 15%? What will be the internal rate of return?
[10] TW Cable Co. plans to begin operation in a large town and to expand later to a nearby small town. TW estimates its net cash flows to be:
| Time (year) | Cash Flow |
| 0 | -$600,000 |
| 1 | 100,000 |
| 2 | 100,000 |
| 3 | -50,000 (expansion) |
| 4-9 | 150,000 |
| 10 | 700,000 (includes sale of business) |
Find the net present value at 17% and the internal rate of return.
[11] A food concession at an airport has a five-year life and costs $130,000. Initial investments in equipment, training, and inventory amount to $75,000. The concession’s operation is expected to produce net cash inflows of $50,000 a year, and the residual value of equipment and the ending inventory are expected to total $30,000.
(a) Find the NPV at 15% effective.
(b) Find the internal rate of return.
[12] The owners of a small business are considering three offers from potential purchasers:
- Offer #1: $100,000 cash.
- Offer #2: $80,000 now and $10,000 at the end of each year for five years.
- Offer #3: $25,000 now and $25,000 at the end of each year for five years.
Which offer is most attractive if money is worth 9% to the owners?
[13] A “10%” Government bond is to pay interest of $100 per year for nine years. Find the price investors should be willing to pay for the bond if they want to earn:
(a) 15% effective.
(b) 10% effective.
(c) 5% effective.
[14] The Titan Package Co. finds that a $95,000 investment in automated packaging equipment will save it $20,000 a year for the next 10 years. The equipment will have no value at the end of the 10 years. If the company aims at a rate of return of 15% effective should it purchase the equipment? Why/why not?
[15] The Fast Food Co. can expand into either of two locations. Location A will need an expenditure of $130,000 now and will result in a yearly net cash inflow of $35,000 (at the end of each year) for 10 years and no other benefits. Location B will need expenditures of $150,000 now and $50,000 in one year. It will then produce a yearly net cash flow of $45,000 a year for the following 12 years (all at the end of each year). In location B, there would also be no other benefits. Which location gives the higher net present value at a required rate of return of 16% effective per year?
[16] You are considering a home-based business. You would like to open a kennel. You estimate that your start-up costs will be $250,000 this year, and you will need to spend another $10,000 next year. You expect revenues of $35,000 per year for the first two years and $42,000 for the next three years. Your expenses are thought to be $6,000 per year. At the end of five years, you plan to sell the kennel and anticipate receiving $255,000. You want to earn a minimum of 14% compounded annually on your investment. All revenue occurs at the end of the year, and all expenses are paid at the beginning of the year.
(a) Calculate the payback for this project.
(b) Calculate the net present value for this project. Should you open a kennel?
(c) If you require only 12% effective should you open a kennel? Why or why not?
(d) How much should the start-up costs be reduced by so that you would be willing to open a kennel? Use a MARR of 14%.
(e) Your estimate of the kennel’s selling price may be too low. You think you may be able to sell the kennel for more than $255,000. What is the minimum selling price you must have so that you would be willing to open the kennel? Assume the start-up costs remain unchanged. Round to the nearest $. Use a MARR of 14%.
(f) Calculate the internal rate of return (IRR) for this project. Should you open a kennel if you want to earn at least 14% compounded annually on your investment?
(source)