What would Happen to the NPV of the Project if the Inflation Rate was Expected to be 4 Percent in Each of the Next Four Years?


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How does this affect the overall rankings of the four locations?



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?


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?


3.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.


4.What would happen to the NPV of the above project if the inflation rate was expected to be 4 percent in each of the next four years?


5.Nina is trying to decide in which of four shopping centres to locate her new boutique. Some locations attract a higher class of clientele than others, some are in an indoor mall, some have a much greater customer traffic volume than others, and, of course, rent varies considerably from one location to another. Because of the nature of her store, she has decided that the class of clientele is the most important consideration, the higher the better. Following this, however, she must pay attention to her expenses and rent is a major item, probably 90 percent as important as clientele. An indoor, temperature-controlled mall is a big help, how­ever, for stores such as hers where 70 percent of sales are from passersby slowly strolling and window shop­ping. Thus, she rates this as about 95 percent as impor­tant as rent. Last, a higher traffic volume of shoppers means more potential sales; she thus rates this factor as 80 percent as important as rent.

As an aid in visualising her location alternatives, she has constructed the following table. A “good” is scored as 3, “fair” as 2, and “poor” as 1. Use a weighted score model to help Nina come to a decision.



6.Referring to Problem 11, develop a spreadsheet to help Nina select a location for her boutique. Suppose Nina is able to negotiate a lower rent at location 3 and thus raise its ranking to “good.” How does this affect the overall rankings of the four locations?


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