Capital Budget

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Cases and Exercises for Value and Capital Budgeting Corporate Finance Academic Year 2012/2013 1. The treasurer of Amaro Canned Fruits has projected the cash flows of projects A, B and C as follows (measured in e): Year 0 Project A Project B Project C Year 1 70, 000 130, 000 75, 000 Year 2 70, 000 130, 000 60, 000 −100, 000 −200, 000 −100, 000 Suppose the relevant discount rate is 12% per annum. (a) Compute the profitability index for each of the three projects. (b) Compute the NPV for each of the three projects. (c) Suppose these three projects are independent. Which project(s) should Amaro accept, based on the profitability index rule? (d) Suppose these three projects are mutually exclusive. Which project(s) should Amaro accept,…show more content…
Sales are projected at 100,000 units per year. Price per unit is £38, variable cost per unit is £25, and fixed costs are £900,000 per year. The tax rate is 35%, and we require a 15% return on this project. (a) Calculate the accounting break-even point. (b) Calculate the base-case cash flow and NPV. What is the sensitivity of NPV to changes in the sales figure? Explain what your answer tells you about a 500-unit decrease in projected sales. (c) What is the sensitivity of OCF to changes in the variable cost figure? Explain what your answer tells you about a £1 decrease in estimated variable costs. (d) Suppose the projections given for price, quantity, variable costs and fixed costs are all accurate to within ±10%. Calculate the best-case and worst-case NPV figures. 5. The firm SENSITIVITY is studying the realisation of a project of launching a new toothpaste. The Marketing Department indicates the following estimations (in thousands of euros): Parameter Sales (quantity) Advertisement costs Sales price Value 1,450 tonnes 10% of sales 5/tonne 2 Cases and Exercises for Value and Capital Budgeting The costs associated with the project are Parameter Raw material Labour costs Capital investment Value 2/tonne 1,000 6,000 The project’s duration is three years and the Planning Department thinks that the adequate real interest rate is 7.398%. The corporate tax is 40%.1 (a) Analyse the economic viability of the project, assuming real prices. (b) The

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