Castle View Games would like to invest in a division to develop software for a​ soon-to-be-released video game console. To evaluate this​ decision, the firm first attempts to project the working capital needs for this operation. Its chief financial officer has developed the following estimates​ (in millions of​ dollars): 1. Assuming that Castle View currently does not have any working capital invested in this​ division, calculate the cash flows associated with changes in working capital for the first five years of this investment. ​(Note: Enter decreases as negative​ numbers.) The change in working capital for year 1 is ​$nothing million.  ​(Round to the nearest​ integer.) The change in working capital for year 2 is ​$____________________ million.  ​(Round to the nearest​ integer.) The change in working capital for year 3 is ​$__________________________ million.  ​(Round to the nearest​ integer.) The change in working capital for year 4 is ​$nothing million.  ​(Round to the nearest​ integer.) The change in working capital for year 5 is ​$_________________________ million.  ​(Round to the nearest​ integer.)   1: Data Table ​       Year 1 Year 2 Year 3 Year 4 Year 5 1 Cash 6   12   15   15   15   2 Accounts Receivable 21   22   24   24   24   3 Inventory 5   7   10   12   13   4 Accounts Payable 18   22   24   25   30

Solve Part 3.2 please   Part 3: Capital Budgeting and Project EvaluationCase Study: Assume that the company, where you are working as a team in Financial Department,is considering a potential project with a new product. It will require the company to buy a newequipment that will generate the same revenue for the company each year. The table below showsthe initial and annual costs for each option.3.1. Capital Budgeting Decision Making: Perform capital budgeting technique based on EquivalentAnnual Cost (EAC) to advise the Company Management which option should be chosen if therelevant discount rate is 9%?Costs Option A Option BInitial Investment 1,400,000 1,500,000Year 1 35,000 25,000Year 2 35,000 25,000Year 3 35,000 25,000Year 4 35,000 25,000Year 5 25,0003.2. Risk Analysis and Project evaluation:Assume that the company finally chose Option B. It expects to sell 600,000 units of the new productfor an average price of $15 per unit. The Equipment in Option B has a residual value of $300…

Problem 10.24Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 9 percent discount rate for their production systems,Year System 1 System 20 -$14,800 -$45,662 1 15,037 32,200 2 15,037 32,200 3 15,037 32,200 Compute the IRR for both production system 1 and production system 2. (Round answers to 2 decimal places, e.g. 15.25.)a). IRR of system 1 is __% and IRR of system 2 is ___% b).Which has the higher IRR, System 1 or System 2?   c). Compute the NPV for both production system 1 and production system 2. (Round answers to 2 decimal places, e.g. 15.25 or 15.25%.)NPV of system 1 is $ ____ and NPV of system 2 is ____d). Which production system has the higher NPV? System 1 or System 2?

QUESTION 5. Happy Printers Ltd is evaluating four mutually exclusive projects which are competing for the same investment capital.  The company’s main objective is maximising shareholder value.   Some analysis has been performed and you have been given the results by your manager who is not familiar with investment appraisal techniques.   Project A B C D Payback Period 4 years 5 years 3 years 3 years Accounting Rate of Return 6% 7% 7% 5% Net Present Value £16,320 £(16,100) £16,100 £15,900 Internal Rate of Return 9% 8% 9% 7% Initial Outlay Required £50,000 £35,000 £45,000 £60,000   Required   a) Recommend which one of the projects should be undertaken explaining why you have chosen that one.   b) Discuss the limitation of the investment appraisal techniques used for the benefit of your manager including reference to academic sources to support your explanations.

Use the following information for Exercises 11-31 and 11-32: Washington Company has two divisions: the Adams Division and the Jefferson Division. The following information pertains to last years results: Washingtons actual cost of capital was 12%. Exercise 11-31 Economic Value Added Refer to the information for Washington Company above. Required: 1. Calculate the EVA for the Adams Division. 2. Calculate the EVA for the Jefferson Division. 3. CONCEPTUAL CONNECTION Is each division creating or destroying wealth? 4. CONCEPTUAL CONNECTION Describe generally the types of actions that Washingtons management team could take to increase Jefferson Divisions EVA?

OPTIMAL CAPITAL STRUCTURE Assume that you have just been hired as business manager of Campus Deli (CD), which is located adjacent to the campus. Sales were 1,100,000 last year, variable costs were 60% of sales, and fixed costs were 40,000. Therefore, EBIT totaled 400,000. Because the universitys enrollment is capped, EBIT is expected to be constant over time. Because no expansion capital is required, CD distributes all earnings as dividends. Invested capital is 2 million, and 80,000 shares are outstanding. The management group owns about 50% of the stock, which is traded in the over-the counter market. CD currently has no debtit is an all-equity firmand its 80,000 shares outstanding sell at a price of 25 per share, which is also the book value. The firms federal-plus-state tax rate is 40%. On the basis of statements made in your finance text, you believe that CDs shareholders would be better off if some debt financing were used. When you suggested this to your new boss, she encouraged you to pursue the idea but to provide support for the suggestion. In todays market, the risk-free rate, rRF, is 6%, and the market risk premium, RPM, is 6%. CDs unlevered beta, bU, is 1 0. CD currently has no debt, so its cost of equity (and WACC) is 12%. If the firm was recapitalized, debt would be issued and the borrowed funds would be used to repurchase stock. Stockholders, in turn, would use funds provided by the repurchase to buy equities in other fast-food companies similar to CD. You plan to complete your report by asking and then answering the following questions. a. 1. What is business risk? What factors influence a firms business risk? 2. What is operating leverage, and how does it affect a firms business risk? 3. What is the firms return on invested capital (ROIC)? b. 1. What do the terms financial leverage and financial risk mean? 2. How does financial risk differ from business risk? c. To develop an example that can be presented to CDs management as an illustration, consider two hypothetical firms: Firm U with zero debt financing and Firm L with , of 12% debt. Both firms have 20,000 in invested capital and a 40% federal-plus-state tax rate, and they have the following EBIT probability distribution for next year: Probability EBIT 025 2,000 0.50 3,000 025 4,000 1. Complete the partial income statements and the firms ratios in Table IC 14.1. 2. Be prepared to discuss each entry in the table and to explain how this example illustrates the effect of financial leverage on expected rate of return and risk. d. After speaking with a local investment banker, you obtain the following estimates of the cost of debt at different debt levels (in thousands of dollars): Amount Borrowed Debt/Capital Ratio D/E Ratio Bond Rating rj 0 0 0 250 0.125 0.1429 AA 8.0% 500 0.250 03333 A 9.0 750 0375 0.6000 BBB 113 1,000 0.500 1.0000 BB 14.0 Now consider the optimal capital structure for CD. 1. To begin, define the terms optimal capital structure and target capital structure. 2. Why does CDs bond rating and cost of debt depend on the amount of money borrowed? 3. Assume that shares could be repurchased at the current market price of 25 per share. Calculate CDs expected EPS and TIE at debt levels of 0, 250,000, 500,000, 750,000, and 1,000,000. How many shares would remain after recapitalization under each scenario? 4. Using the Hamada equation, what is the cost of equity if CD recapitalizes with 250,000 of debt? 500,000? 750,000? 1,000,000? 5. Considering only the levels of debt discussed, what is the capital structure that minimizes CDs WACC? 6. What would be the new stock price if CD recapitalizes with 250,000 of debt? 500,000? 750,000? 1,000,000? Recall that the payout ratio is 100%, so g 0. 7. Is EPS maximized at the debt level that maximizes share price? Why or why not? 8. Considering only the levels of debt discussed, what is CDs optimal capital structure? 9. What is the WACC at the optimal capital structure? d. Suppose you discovered that CD had more business risk than you originally estimated. Describe how this would affect the analysis. How would the analysis be affected if the firm had less business risk than originally estimated? e. What are some factors a manager should consider when establishing his or her firms target capital structure? f. Put labels on Figure IC 14.1 and then discuss the graph as you might use it to explain to your boss why CD might want to use some debt. g. How does the existence of asymmetric information and signaling affect capital structure?

CAMPUS DELI INC. OPTIMAL CAPITAL STRUCTURE Assume that you have just been hired as business manager of Campus Deli (CD), which is located adjacent to the campus. Sales were 1,100,000 last year, variable costs were 60% of sales, and fixed costs were 40,000. Therefore, EBIT totaled 400,000. Because the university's enrollment is capped, EBIT is expected to be constant over time. Because no expansion capital is required, CD distributes all earnings as dividends. Invested capital is 2 million, and 80,000 shares are outstanding. The management group owns about 50% of the stock, which is traded in the over-the-counter market. CD currently has no debtit is an all-equity firmand its 80,000 shares outstanding sell at a price of 25 per share, which is also the book value. The firm's federal-plus-state tax rate is 40%. On the basis of statements made in your finance text, you believe that CD's shareholders would be better off if some debt financing were used. When you suggested this to your new boss, she encouraged you to pursue the idea but to provide support for the suggestion. In today's market, the risk-free rate, rRF, is 6%, and the market risk premium, RPM, is 6%. CD's unlevered beta, bU, is 1.0. CD currently has no debt, so its cost of equity (and WACC) is 12%. If the firm was recapitalized, debt would be issued and the borrowed funds would be used to repurchase stock. Stockholders, in turn, would use funds provided by the repurchase to buy equities in other fast-food companies similar to CD. You plan to complete your report by asking and then answering the following questions. a. 1. What is business risk? What factors influence a firm's business risk? 2. What is operating leverage, and how does it affect a firm's business risk? 3. What is the firm's return on invested capital (ROIC)? b. 1. What do the terms financial leverage and financial risk mean? 2. How does financial risk differ from business risk? c. To develop an example that can be presented to CD's management as an illustration, consider two hypothetical firms: Firm U with zero debt financing and Firm L with 10,000 of 12% debt. Both firms have 20,000 in invested capital and a 40% federal-plus-state tax rate, they have the following EBIT probability distribution for next year: Probability EBIT 0.25 2,000 0.50 3,000 0.25 4,000 d. After speaking with a local investment banker, you obtain the following estimates of the cost of debt at different debt levels (in thousands of dollars): Now consider the optimal capital structure for CD. 1. To begin, define the terms optimal capital structure and target capital structure. 2. Why does CD's bond rating and cost of debt depend on the amount of money borrowed? 3. Assume that shapes could be repurchased at the current market price of 25 per share. Calculate CD's expected EPS and TIE at debt levels of 0, 250,000, 500,000, 750,000, and 1,000,000. How many shares would remain after recapitalization under each scenario? 4. Using the Hamada equation, what is the cost of equity if CD recapitalizes with 250,000 of debt? 500,000? 750,000? 1,000,000? 5. Considering only the levels of debt discussed, what is the capital structure that minimizes CD's WACC? 6. What would be the new stock price if CD recapitalizes with 250,000 of debt? 500,000? 750,000? 1,000,000? Recall that the payout ratio is 100%, so g = 0. 7. Is EPS maximized at the debt level that maximizes share price? Why or why not? 8. Considering only the levels of debt discussed, what is CD's optimal capital structure? 9. What is the WACC at the optimal capital structure? e. Suppose you discovered that CD had more business risk than you originally estimated. Describe how this would affect the analysis. How would the analysis be affected if the firm had less business risk than originally estimated? Income Statements and Ratios TABLE IC 13.1 f. What are some factors a manager should consider when establishing his or her firm's target capital structure? g. Put labels on Figure IC 13.1 and then discuss the graph as you might use it to explain to your boss why CD might want to use some debt. h. How does the existence of asymmetric information and signaling affect capital structure? FIGURE IC 13.1 Relationship between Capital Structure and Stock Price

INTEGRATED CASE ALLIED FOOD PRODUCTS CAPITAL BUDGETING AND CASH FLOW ESTIMATION Allied Food Products is considering expanding into the fruit juice business with a new fresh lemon juice product. Assume that you were recently hired as assistant to the director of capital budgeting, and you must evaluate the new project. The lemon juice would be produced in an unused building adjacent to Allied's Fort Myers plant; Allied owns the building, which is fully depreciated. The required equipment would cost 200,000, plus on additional 40,000 for shipping and installation. In addition, inventories would rise by 25,000, while accounts payable would increase by 5,000. All of these costs would be incurred at t = 0. By a special ruling, the machinery could be depreciated under the MACRS system as 3-year property. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The project is expected to operate for 4 years, at which time it will be terminated. The cash inflows are assumed to begin 1 year after the project is undertaken, or at t = 1, and to continue out to t = 4. At the end of the project's life (t = 4), the equipment is expected to have a salvage value of 25,000. Unit sales are expected to total 100,000 units per year, and the expected sales price is 2.00 per unit. Cash operating costs for the project (total operating costs less depreciation) are expected to total 60% of dollar sales. Allied's tax rate is 40%, and its WACC is 10%. Tentatively, the lemon juice project is assumed to be of equal risk to Allied's other assets. You have been asked to evaluate the project and to make a recommendation as to whether it should be accepted or rejected. To guide you in your analysis, your boss gave you the following set of tasks/ questions: a. Allied has a standard form that is used in the capital budgeting process. (See Table IC 12.1.) Part of the table has been completed, but you must replace the blanks with the missing numbers. Complete the table using the following steps: 1. Fill in the blanks under Year 0 for the initial investment outlays: CAPEX and NOWC. 2. Complete the table for unit sales, sales price, total revenues, and operating costs excluding depreciation. 3. Complete the depreciation data. 4. Complete the table down to after-tax operating income and then down to the project's operating cash flows, EBIT(1 T) + DEP. 5. Fill in the blanks under Year 4 for the terminal cash flows and complete the project free cash flow line. Discuss the recovery of net operating working capital. What would have happened if the machinery had been sold for less than its book value? b. 1. Allied uses debt in its capital structure, so some of the money used to finance the project will be debt. Given this fact, should the projected cash flows be revised to show projected interest charges? Explain. 2. Suppose you learned that Allied had spent 50,000 to renovate the building last year, expensing these costs. Should this cost be reflected in the analysis? Explain. 3. Suppose you learned that Allied could lease its building to another party and earn 25,000 per year. Should that fact be reflected in the analysis? If so, how? 4. Assume that the lemon juice project would take profitable sales away from Allied's fresh orange juice business. Should that fact be reflected in your analysis? If so, how? c. Disregard all the assumptions made in part b and assume there is no alternative use for the building over the next 4 years. Now calculate the project's NPV, IRR, MIRR, and payback. Do these indicators suggest that the project should be accepted? Explain. Allied's Lemon Juice Project (in Thousands) TABLE IC 12.1 TABLE IC 12.2 Allied's Lemon Juice Project Considering 5% Inflation (in Thousands) d. If this project had been a replacement rather than an expansion project, how would the analysis have changed? Think about the changes that would have to occur in the cash flow table. e. 1. What three levels, or types, of project risk are normally considered? 2. Which type is most relevant? 3. Which type is easiest to measure? 4. Are the three types of risk generally highly correlated? f. 1. What is sensitivity analysis? 2. How would you perform a sensitivity analysis on the unit sales, salvage value, and WACC for the project? Assume that each of these variables deviates from its base-case, or expected, value by plus or minus 10%, 20%, and 30%. Explain how you would calculate the NPV, IRR, MIRR, and payback for each ease; but don't do the analysis unless your instructor asks you to. 3. What is the primary weakness of sensitivity analysis? What are its primary advantages? Work out quantitative answers to the remaining questions only if your instructor asks you to. Also note that it will take a long time to do the calculations unless you are using an Excel model. g. Assume that inflation is expected to average 5% over the next 4 years and that this expectation is reflected in the WACC. Moreover, inflation is expected to increase revenues and variable costs by this same 5%. Does it appear that inflation has been dealt with properly in the initial analysis to this point? If not, what should be done and how would the required adjustment affect the decision? h. The expected cash flows, considering inflation (in thousands of dollars), are given in Table IC 12.2. Allied's WACC is 10%. Assume that you are confident about the estimates of all the variables that affect the cash flows except unit sales. If product acceptance is poor, sales would be only 75,000 units a year, while a strong consumer response would produce sales of 125,000 units. In either case, cash costs would still amount to 60% of revenues. You believe that there is a 25% chance of poor acceptance, a 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case). Provide numbers only if you are using a computer model. 1. What is the worst-case NPV? The best-case NPV? 2. Use the worst-case, most likely case (or base-case), and best-case NPVs with their probabilities of occurrence, to find the project's expected NPV, standard deviation, and coefficient of variation. i. Assume that Allied's average project has a coefficient of variation (CV) in the range of 1.25 to 1.75. Would the lemon juice project be classified as high risk, average risk, or low risk? What type of risk is being measured here? j. Based on common sense, how highly correlated do you think the project would be with the firm's other assets? (Give a correlation coefficient or range of coefficients, based on your judgment.) k. How would the correlation coefficient and the previously calculated combine to affect the project's contribution to corporate, or within-firm, risk? Explain. l. Based on your judgment, what do you think the project's correlation coefficient would be with respect to the general economy and thus with returns on the market? How would correlation with the economy affect the project's market risk? m. Allied typically adds or subtracts 3% to its WACC to adjust for risk. After adjusting for risk, should the lemon juice project be accepted? Should any subjective risk factors be considered before the final decision is made? Explain. n. In recent months, Allieds group has begun to focus on real option analysis. 1. What is real option analysis? 2. What are some examples of projects with embedded real options?

2A- The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year were several times aslarge? 2B- A piece of laborsaving equipment has just come onto the market that Mitsui Electronics, Ltd., could use to reduce costs in one of its plants in Japan. Relevant data relating to the equipment follow:Required:Compute the payback period for the equipment. If the company requires a payback period offour years or less, would the equipment be purchased?

Question 2.Hyde Park Tours Limited is planning to diversify its operations by exploring two newbusiness opportunities. Opportunity City Bus Tour has an expected working life of fouryears, requires £175000 of initial capital expenditure and a further £50000 of workingcapital. At the end of year 4 the residual value is forecast to be £100000. Opportunity Cruisealso has an estimated working life of four years and has an initial cash outflow of £250000which includes working capital of £135000. At the end of year 4 the residual value isestimated to be £100000. Estimates for net cash flow for both projects are as follows:Year City Bus Tour Cruise1 £90,000 £95,0002 £75,000 £90,0003 £70,000 £85,0004 £75,000 £80,000Year Present Value Rates at 15% Present Value Rates at 30%1 0.870 0.7692 0.756 0.5923 0.658 0.4554 0.572 0.350Required: -a. Utilising the above information, numerically assess the projects using: -- Payback- Net Present Value using the present value rates at 15%- Internal rate of…