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Hawkeye Harvesters, Inc. is engaged in a contract with the United States Government to supply farm machinery. Hawkeyes required return is 11.2%. Their marginal tax rate is 35%. HHI must have $100,000 in working capital at the start of the project and must add $10,000 to working capital at the start of years 2, 3, 4, and 5. The project will be discontinued after 5 years with no salvage value on any equipment. What is the effect on NPV of net working capital?

There is no effect on NPV

NPV is reduced by $40,000.

NPV is reduced by $48,554.

NPV is increased by $140,000.

None of the above are within $100 of the correct answer.

The De Falla Threecorner Hat Co. has two mutually exclusive possible investments. In the first investment, they will have a cost of $40,000 today, and then will receive payments of $19,000 at the end of each of the next three years. The alternative investment will cost $25,000 today, and then De Falla will receive payments of $13,000 at the end of each of the next three years. At what required rate of return would the two investments have the same NPV?

8.8%

9.7%

10.5%

11.3%

12.5%

20. Dublin Methodist Hospital is considering the purchase of a new rapid diagnostic machine. The system will cost $400,000 and will be depreciated straight-line to zero over its five-year life. It will be worth $50,000 at the end of that time. The hospital will save $130,000 per year in laboratory costs and will also be able to reduce their inventory of lab supplies by $50,000 upon purchasing the new machine. If the tax rate is 35%, what is the IRR for this project?

17.25%

19.93%

22.59%

25.31%

27.25%

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