105 Review Problems

Chapter 10 Review Problems

1. Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. What is the payback period of this project?

2. Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. The company estimates that these fixtures will last for 10 years. If the company’s cost of funds is 8%, what is the NPV of this project?

3. If Westland Manufacturing finds that its cost of funds is 11%, what will happen to the NPV of the project in problem 2?

4. Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. The company estimates that these fixtures will last for 10 years. What is the IRR of this project?

5. Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. The company estimates that these fixtures will last for 10 years. If the company’s cost of funds is 8%, what is the PI of this project?

6. Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. The company estimates that these fixtures will last for 10 years. If the company’s cost of funds is 8%, what is the modified IRR of this project?

7. Westland Manufacturing spends $20,000 to update the lighting in its factory to more energy-efficient LED fixtures. This will save the company $4,000 per year in electricity costs. The company estimates that these fixtures will last for 10 years. If the company’s cost of funds is 8%, what is the discounted payback period of this project?

8. Holiday Hotels is considering two different floorings to use in its buildings. The less expensive tile will need to be replaced every five years. The more durable, more expensive tile will need to be replaced every eight years. To use the replacement chain approach to compare these two projects, how many times would you have to assume each type of tile would be replaced?

9. You will be living in your college town for two more years. You are considering purchasing a townhouse that will cost you $250,000 today. You estimate that if you do, your expenses for each of the next two years will be $6,000 less than if you rented an apartment. You think that you would be able to lease the townhouse to another college student afterward for $12,000 per year and that your taxes, maintenance, and other expenses for the townhouse would be $5,000 per year. You expect to lease the townhouse for five years before you sell it, and you expect to be able to sell the townhouse for $275,000. Use Excel to create an NPV profile for this undertaking. If it will cost you 3% to borrow money, should you buy the townhouse? What if it will cost you 8% to borrow money?