Questions: 1) A firm considers an investment whose cost is $ 3 000 000 which is paid in 2023. The expected cash flows from this investment are as follows:

2024 $ 500 000

2025 $ 700 000

2026 $ 1 000 000

2027 $ 1 000 000

2028 $ 800 000

2029 $ 600 000

The firms desired target payback period is 3 years which means that firm accepts all projects with a payback period less than 3 years.

a) Find the exact payback period of this investment on the basis of simple payback period.

b) Should the firm accept or reject this investment (give your answer simply as accept or reject)

Note: Notice that I want to see the exact payback period which means you need to use interpolation. See my written notes to understand how the interpolation is done.

2) Let us consider the same investment whose cost and expected cash flows are given in Question 1 using discounted payback period. a) What is the exact payback period of that investment according to the discounted payback method if the relevant discount rate for that investment is 14% b) Should the firm accept or reject this investment if the desired payback period of the investment is 3 years.

3) A firm considers to buy a new machine whose expected lifetime is 6 years. The cost of the machine is $ 3 000 000 which is paid in 2023. The expected cash flows of this investment are as follows:

2024: $ 700 000

2025: $ 800 000

2026: $ 1 200 000

2027: $ 1 300 000

2028: $ 900 000

2029: $ 600 000

a) Find the net present value of this investment using a discount rate of 18%

b) Should the firm accept or reject this investment (write accept or reject as your answer) ?

c) What is the expected contribution of that investment to the value of the firm (give a numerical answer) ?

d) Find the PI value (profitability index) using the cost of investment and the expected cashflows of this problem and mention if the investment is accepted or rejected.

4) A firm considers to buy a new 3D printer whose cost is $ 46 100. The cost of 3D printer will be paid in 2023. The expected cash flows of this investment are as follows:

2024: $ 13 200

2025: $ 13 200

2026: $ 13 200

2027: $ 13 200

2028: $ 13 200

The firm plans to sell this 3D printer at the end of 2028 and expects that it can sell the 3D printer in the market for $ 20 000 (the salvage value of the 3D printer is $ 20 000)

a) Find the Internal Rate of Return (IRR) of this project.

b) Given that the current annual interest rate is 15% and the risk premium appropriate for this investment is 5%; should the firm accept or reject this investment. Note: If you do not have access to a sophisticated calculator or Excel which you need to provide a numerical answer; write the relevant formula for IRR. If your formula is correct; you receive full grade for question 4a. Write the decision criteria according to which we accept or reject an investment on basis of IRR (e.g write something like a>b specifying what a is and what b is) to get full credit for 4b in case you are unable to calculate the IRR.