HW7_Solution_13_Mar_24_Marking_Comments

NPV profiles WACC (Dollars in Millions) Plan A Plan B Project NPV Calculations: NPVA NPVB Project IRR Calculations: IRRA IRRB NPV Profiles: Discount Rates 0% 5% 10% 15% 20% 22% 25% 11.00% NPVA $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 0 -$40.00 Formulas #N/A #N/A -$11.00 $2.47 $2.47 $2.47 #N/A #N/A NPVB 1 $6.39 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 2 3 $6.39 $6.39 4 $6.39 $2.47 5 6 7 $6.39 $6.39 $6.39 $2.47 $2.47 8 9 $6.39 $6.39 $2.47 $2.47 $2.47 10 $6.39 $2.47 11 $6.39 12 $6.39 13 $6.39 $2.47 $2.47 $2.47 14 $6.39 15 $6.39 $2.47 $2.47 16 $6.39 $6.39 $2.47 17 39 $2.47

Compute the project cost. Gross income 1,000,000 Life of project Operating cost Rate of project 500,000 5 years 20% Benefit ratio 1.08 O a. P1,384,543.00 O b. P1,348,543.00 O c. P1,384,534.00 O d. P1,384,453.00

MACHINE A MACHINE B INITIAL COST R100 000 R110 000 EXPECTED ECONOMIC LIFE 5 YEARS 5 YEARS EXPECTED DISPOSAL/RESIDUAL VALUE R10 000   EXPECTED NET CASH INFLOWS R R END OF: YEAR 1 34 000 33 000 YEAR 2 27 000 33 000 YEAR 3 32 000 33 000 YEAR 4 30 000 33 000 YEAR 5 26 000 33 000 DEPRECIATION PER YEAR 18 000 22 000 COMPANY ESTIMATES COST CAPITAL = 14%     2) Calculate the accounting rate of return (on average investment) for Machine A. (answer rounded offto 2 decimal places).

Internal rate of return and modified internal rate of return. Quark Industries has three potential projects, all with an initial cost of $2,100,000. Given the discount rate and the future cash flow of each project in the following table, E, what are the IRRS and MIRRS of the three projects for Quark Industries?

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Discount Rate 12%         Investment Project Cash Flow Total Net Cash Flow Initial Investment  $           (8,000)  ?  Year 1  $                800 ? Year 2  $                900 ? Year 3  $            1,500 ? Year 4  $            1,800 ? Year 5  $            3,200         NPV of investment $ ? Estimated Payback Period ?       Estimate the total net cash flows, NPV of Investment and Estimated Payback Period using the excel's formula.

What is the project's MIRR? r = 10.00% 0 Year Cash flows O a. 22.51% O b. 11.75% O c. 17.21% O d. 14.81% O e. 15.65% -$875 1 $300 2 $320 3 $340 $360

The two projects are as follows. Discount rate = 10%.                                     Project X     Project Y                               Year    Cash-Flow      Cash-Flow                               0       -$100,000           -$100,000                               1          50,000             10,000                               2          40,000             30,000                                3.       30,000              40,000                               4          10,000        60,000   Calculate the NPV of project X $6,032.99 $4,239.20 $7,881.98 $4,917.70 Calculate IRR of project X. 19% 49% 79% 59% Calculate the payback period of project X 33 years 33 years 33 years 33 years Calculate the crossover rate. 93% 58% 00% 17%

11:52 Investment Appraisal (Year 2 Column 2... 6. Discount Factor (5%) Year 0 -450,000 150,000 1.00 Year 1 0.952 Year 2 180,000 0.907 Year 3 250,000 0.864 Year 4 200,000 0.823 Year 5 200,000 0.784 What is the NPV ? £530,000 £298,595 £393,460 7. Based on NPV which project would you ассept? Net Cash F Net Cash F Net Cash F Project 1 (110,000) (105,000) Project 3 (116,000) Project 2 Year 0 ... Activity Chat Teams Assignments More

Exercise (NPV) - 20 mins Project A, B and C have the following cash-flow projections: Year Project A (S) -10,000 3.000 0 1 2 3 3,000 3.000 3,000 Project B (S) -10,000 1,000 2,000 . 4,000 8,000 Project C (S) -14,000 8,000 8,000 -3,000 -5,000 * Calculate the Payback Period and Net Present Value (NPV) for each of the projects shown. Assume, i=10% Decide which is the best project. Justify! What is the advantages of IRR over NPV as a measure of profitability?

Two alternatives are being considered for a certain project. B $15,000 $3,800 Initial Cost Uniform annual benefits Useful life A $10,000 $2,500 O a. 1.37 O b. 1.27 O c. 1.07 O d. 1.17 6 6 If money is worth 12% annually, compute the benefit ratio of the difference between the alternatives.

Georgetown                                        Berbice Income before tax.                                  20,000                                               75,000Required rate of return.                            12%                                                     12%Investment                                              100,000                                             500,000 Calculate the residual income for Georgetown a. 1,500 b. 150,000 c.  15,000 d. 8,000

Amount Desired at End of Period Length of Time Rate Compounded $ 17,600.00 7 2% Quarterly Required: Complete the following using the information above and the present value Table 12.3 or the present value table in the Business Math Handbook or the present value formula to answer the following: Period Used Rate Used PV factor used PV of amount desired at end of period

Show your solutions clearly

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Year O 1 2 3 4 Project X - $20,000 13,330 5,960 5,960 1,920 Project Y - $20,000 The PI for project X is 6,470 6,470 6,470 6,470 The cost of capital for both projects is 10 percent. Calculate the profitability index (PI) for each project. (Do not round discount factors. Round intermediate calculations to 2 decimal places, e.g. 15.25 and final answers to 4 decimal places, e.g. 1.2527.) Which project, or projects, should be accepted if you have unlimited funds to invest? If you have unlimited funds you should invest in and the PI for project Y is Which project should be accepted if they are mutually exclusive? If they are mutually exclusive you should invest in

MACHINE A MACHINE B INITIAL COST R100 000 R110 000 EXPECTED ECONOMIC LIFE 5 YEARS 5 YEARS EXPECTED DISPOSAL/RESIDUAL VALUE R10 000   EXPECTED NET CASH INFLOWS R R END OF: YEAR 1 34 000 33 000 YEAR 2 27 000 33 000 YEAR 3 32 000 33 000 YEAR 4 30 000 33 000 YEAR 5 26 000 33 000 DEPRECIATION PER YEAR 18 000 22 000 COMPANY ESTIMATES COST CAPITAL = 14%     1) Calculate the payback period for Machine A and B (answers must be expressed in years, monthsand days).

Discount rate used 10% 15% 20% What is the approximate IRR of this project? 20% 17.5% 15% NPV +£130k +£50k -£50k 22.5%

Find the NPV using 11% discount Year 0-3, Project A, B

i=8% 1- Use B/C ratio to recommend alternative. A B First cost $22,000 $30,000 Annual benefits 6,000 10,000 Annual cost 1,000 3,500 Midlife overhaul 4,000 7,500 Salvage value 3,000 8,000 Useful life 6 years 6 years

Find the value of P for which the inflows will equal the outflows. Find the effective rate first. Rate Year Outflows 0 1 2 3 4 5 678 9 10 -P -2P -4P -8P -16P $1,530 $2,545 $3,269 $3,490 18% pycd Inflows $24,000 $30,000 $36,000 $42,000 $48,000 $54,000

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