Radiology Associates

Unit 5: Homework Assignment

· Prompt: Answer the following questions.

1. You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 7 percent? What if the discount rate is 10 percent?

Year 1 Project A Project B

0 -$275,000 -$202,000

1 0 136,000

2 0 81,900

3 360,000 47,000

.

2. Radiology Associates is considering an investment, which will cost $259,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $58,000. This inflow will increase to $150,000 and then $200,000 for the following two years before ceasing permanently. The firm requires a 14 percent rate of return and has a required discounted payback period of 3.5 years. Accept or reject this project? Why?

3. What is the internal rate of return of a project that costs $20,070 if it is expected to generate $8,500 per year for three years?

4. Kansas Furniture Corporation is evaluating a capital budgeting project that costs $34,000 and is expected to generate after-tax cash flows equal to $14,150 per year for three years. KFC’s required rate of return is 12 percent. Compute the project’s NPV and IRR. Should the project be accepted and purchased?

5. Consider the following two mutually exclusive projects.

Time Project A Project B

0 -$300 -$405

1 -$387 $134

2 -$193 $134

3 $100 $134

4 $600 $134

5 $600 $134

6 $850 $150

7 $180 $284

What is each project’s payback, discounted payback, IRR and NPV with a cost of capital of 12%? Which project should be selected?