Question

1A) What is the discount rate at which the following cash flows have a NPV of $0? Answer in %, rounding to 2 decimals.

Year 0 cash flow = -158,000
Year 1 cash flow = 30,000
Year 2 cash flow = 36,000
Year 3 cash flow = 38,000
Year 4 cash flow = 39,000
Year 5 cash flow = 43,000
Year 6 cash flow = 42,000

1B) Your firm is evaluating a capital budgeting project. The estimated cash flows appear below. The board of directors wants to know the expected impact on shareholder wealth. Knowing that the estimated impact on shareholder wealth equates to net present value (NPV), you use your handy calculator to compute the value. What is the project's NPV? Assume that the cash flows occur at the end of each year. The discount rate (i.e., required rate of return, hurdle rate) is 17.1%. (Round to nearest penny)

Year 0 cash flow	-96,000
Year 1 cash flow	48,000
Year 2 cash flow	40,000
Year 3 cash flow	53,000
Year 4 cash flow	43,000
Year 5 cash flow	25,000

1C) Spacely Sprockets Inc is a new start-up evaluating a new project. They worry that they don't have all the requisite operating information they will need to estimate Cash Flows From Assets and that they wouldn't be able to evaluate this project based on NPV and IRR (which both use the CFFA's to evaluate). Instead they have decided to use the Average Accounting Return (AAR) rule to evaluate the project. What is the AAR for this project? (Enter your answer as a percentage and Round to 2 decimals)

Accounting Info for Spacely Sprockets

	Net Income	Book Value of Assets
Year 1	42,000	526,000
Year 2	52,000	607,000
Year 3	62,000	699,000

ANSWER EACH PART (A,B,C)

Answer 1

1A)		cash flows	Lower Discount rate @10%	Present value	Higher discount rate @15 %	Present value
	Year 0	-158000	1.00	-158000	1.00	-158000
	Year 1	30000	0.91	27270	0.87	23724.9
	Year 2	36000	0.83	29736	0.75	22302
	Year 3	38000	0.75	28538	0.66	18835.08
	Year 4	39000	0.68	26637	0.57	15183.09
	Year 5	43000	0.62	26660	0.50	13330
	Year 6	42000	0.56	23688	0.43	10185.84
	Net Present value			4529		-54439.09
	IRR= L+ (NPV at lower rate/NPV at lower rate-NPV at higher rate)*higher rate-lower rate
	10+[4529/4529+54439.09]	*5 = 10.38%
		cash flows	Discount rate @17.1%
1B)	Year 0	-96000	1	-96000
	Year 1	48000	0.85	40800
	Year 2	40000	0.72	28800
	Year 3	53000	0.62	32860
	Year 4	43000	0.53	22790
	Year 5	25000	0.45	11250
	Net Present value of project			40500
1C)		Net Income	Book value of asset
	Year 1	42000	526000
	Year 2	52000	607000
	Year 3	62000	699000
	Average balance	52000	610666.67
	Average accounting return=(Average profit/Average book value)*100
	(52000/610666.67)*100 = 8.52%