Homework Problems
Chapter 11

by
Jose Aguilar

for
BUS539 Financial Management
California Baptist University
Professor Stephen Christie

June 18, 2015

Initial Outlay

Given the cost of equipment and the initial investment cost we can calculate the initial outlay by simply summing the Cost of equipment and the initial investment. The total investment outlay is $22 million. The research cost of $150,000 is a sunk cost since it happen last year. Since it was spent last year it is not relevant. No change in investment outlay, it still remains at $22 million. The sum was done in excel.
If the company sells the building then it will represent an opportunity loss. This needs to be incorporated into the initial investment outlay while the project is evaluated. Then, total investment outlay equals $22 million as determined previously plus $1.5 million which equals total investment outlay of $23.5 million

CASH FLOW

Given the information we calculated the problem in excel. Year 0 cash flow is calculated by subtracting base price from installation and required increase inventory thus giving us -1,118,000. The additional Cash Flow in Year 3 equals 605000 + (605000 - 81695)*(.35) + 15500 = 803657 To calculate IRR the following equation was used NPV = 0 = -1118000 + 375612/(1+r)^1 + 418521/(1+r)^2 + (304148 + 803657)/(1+r)^3. We have an IRR as 25.87 or 26%, yes the machine should be purchased.

NPV, IRR, MIRR, and PI

For this problem we reached the same point where we ended up with new cash flow amounts at the end of each year. Also, the WACC rate as well as the initial outlay which allowed us to find certain pieces of information such as the NPV, IRR, MIRR and the PI of the project. The problem was different because the cash flows were not initially given and had to be found for each year. Given the operating cash flows and the depreciation expense