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Problem-1. Two New Internet Site Projects Are Proposed To A

The document presents 8 problems related to financial project analysis. Problem 1 asks to identify the better project of two options based on payback period. Project B is identified as better due to a shorter payback period of 2.9 years vs Project A's 3.3 years. Problem 2 asks to calculate the average rate of return for a project costing $200,000 with $30,000 average annual profit, which is 15%. Problem 3 asks to calculate the net present value of $100,000 savings occurring 1 year after a $50,000 computer expenditure with a 10% interest rate.

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52 views8 pages

Problem-1. Two New Internet Site Projects Are Proposed To A

The document presents 8 problems related to financial project analysis. Problem 1 asks to identify the better project of two options based on payback period. Project B is identified as better due to a shorter payback period of 2.9 years vs Project A's 3.3 years. Problem 2 asks to calculate the average rate of return for a project costing $200,000 with $30,000 average annual profit, which is 15%. Problem 3 asks to calculate the net present value of $100,000 savings occurring 1 year after a $50,000 computer expenditure with a 10% interest rate.

Uploaded by

Tr Andrea
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Problem-1.

Two new internet site projects are proposed to a


young start-up company. Project A will cost $250,000 to
implement and is expected to have annual net cash flows of
$75,000. Project B will cost $150,000 to implement and should
generate annual net cash flows of $52,000. The company is very
concerned about their cash flow. Using the payback period,
which project is better from a cash flow standpoint?
1) Project A: Payback Period = $250,000/$75,000 = 3.3
years.
2) Project B: Payback Period = $150,000/$52,000 = 2.9
years
Project B is better because it has a shorter payback
period.
• Problem-2. Sean, a new graduate at a
telecommunications firm faces the following
problem his first day at the firm. What is the
average rate of return for a Project that costs
$200,000 to implement and has an average
annual profit of $30,000?
• Average Rate of Return = $30,000/$200,000 =
0.15 = 15%
• Problem-3. A project manager is managing a
software development project for a hospital.
There is a new computer available that will speed
up the development process considerably. The
new computer costs $50,000 including shipping,
installation, and startup. The computer will cause
a gross savings of $100,000. What is the net
present value of the savings if they occur one
year after the expenditure for the computer?
Assume a 10% interest rate.
• Problem-4. A four year financial Project has
net cash flows of $20,000; $25,000; $30,000
and $50,000 in the next four years. It will cost
$75,000 to implement the project. If the
required rate of return is 0.2, conduct a
discounted cash flow calculation to determine
the NPV.
• Problem-5. What would happen to the NPV of
the above Project if the inflation rate was
expected to be %4 in each of the next four
years.
• Problem-8. Use a weighted score model to choose between three
methods (A, B, C) of financing the acquisition of a major competitor. The
relative weights for each criterion are shown in the following table as are
the scores for each location on each criterion. A score of 1 represents
unfavorable, 2 satisfactory, and 3 favorable.
Category/Criteria Weight Method-A Method-B Method-C

Consulting cost 20 1 2 3

Acqusition time 20 2 3 1

Distruption 10 2 1 3

Cultural differences 10 3 3 2

Skill redundencies 10 2 1 1

Implementation risks 25 1 2 3

Infrastructure 10 2 2 2

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