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**Question 1:** (10 points). (Net present value calculation) Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $4,000,000 and would generate annual net cash inflows of $900,000 per year for 7 years. Calculate the project’s NPV using a discount rate of 5 percent. (Round to the nearest dollar.)

a. If the discount rate is 5 percent, then the project’s NPV is: |

**Question 2:** (30 points). (Net present value calculation) Big Steve’s, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $90,000 and will generate net cash inflows of $19,000 per year for 11 years. To answer Choose an item questions, click on the orange text and use the pull down menu to select the best answer.

- What is the project’s NPV using a discount rate of 7 percent? (Round to the nearest dollar.)

If the discount rate is 7 percent, then the project’s NPV is: |

Should the project be accepted? **Yes it adds value to the firm**

The project **should be** accepted because the NPV is positive and therefore adds value to the firm.

- What is the project’s NPV using a discount rate of 16 percent?

If the discount rate is 16 percent, then the project’s NPV is: |

Should the project be accepted? Why or why not? The project **should be**accepted because the NPV **is positive and therefore adds value to the firm.**

- What is this project’s internal rate of return? (Round to two decimal places.)

This project’s internal rate of return is: |

Should the project be accepted? Why or why not?

If the project’s required discount rate is 7%, then the project **should be** accepted because the IRR is higher than the required discount rate.

If the project’s required discount rate is 16%, then the project **should be**accepted because the IRR is higher than the required discount rate.

**Question 3:** (15 points). (Related to Checkpoint 11.2) (Equivalent annual cost calculation) Barry Boswell is a financial analyst for Dossman Metal Works, Inc. and he is analyzing two alternative configurations for the firm’s new plasma cutter shop. The two alternatives that are denoted A and B below perform the same task and although they each cost to purchase and install they offer very different cash flows. Alternative A has a useful life of 7 years whereas Alternative B will only last for 3 years. The after-tax cash flows from the two projects are as follows:

- Calculate each project’s equivalent annual cost (EAC) given a discount rate of 10 percent. (Round to the nearest cent.)

a. Alternative A’s equivalent annual cost (EAC) at a discount rate of 10% is: | |

b. Alternative B’s equivalent annual cost (EAC) at a discount rate of 10% is |

- Which of the alternatives do you think Barry should select? Why? (Select the best choice below.)

- This cannot be determined from the information provided.
- Alternative B should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative A.
- Alternative A should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative B.
- Alternative A should be selected because it has the highest NPV.