FNCE 623 - Financial Management Individual assignment Belgravia Petroleum Inc. is trying to evaluate a generation project with the following cash flows: Year Cashflow 0-$300,000,000 1 $63,000,000 2 $85,000,000 3 - $50,000,000 4 $145,000,000 5 $175,000,000 6 -$50,000,000 7 $70,000,000 8 $72,000,000 Construct a spreadsheet and calculate the following (the required rate of return is 12 %): Payback period Discounted payback period Internal rate of return (IRR
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- Part D: Investment Decisions Now consider that Luxio has identified the following two mutually exclusive projects: Year 0 1 2 3 4 Cash Flow (A) -$34,000 $16,500 $14,000 $10,000 $6,000 Cash Flow (B) -$34,000 $5,000 $10,000 $18,000 $19,000. 1. What is the IRR for each of these projects? Based on IRR decision rule, which project should the company accept? 2. If the required return is 11%, what is the NPV for each of these projects? Based on the NPV decision rule, which project should the company accept? 3. Over what range of discount rates would the company choose project A? At what discount rate would the company be indifferent between these two projects? Explain.FNCE 623 – Financial Management Individual assignment Belgravia Petroleum Inc. is trying to evaluate a generation project with the following cash flows: Year Cashflow 0 -$300,000,000 1 $63,000,000 2 $85,000,000 3 -$50,000,000 4 $145,000,000 5 $175,000,000 6 -$50,000,000 7 $70,000,000 8 $72,000,000 Construct a spreadsheet and calculate the following (the required rate of return is 12%): Payback period Discounted payback period Modified IRR The discounting approach The reinvestment approach The combination approach Net present value (NPV) Based on your analysis, should the company take the project? Why? IMPORTANT: Use MS Excel functions (PV, FV, NPV, and IRR) in your spreads please show answer the answer on Excel and full description on Excel sheetQuestion 1 Grey Ltd has provided the following figures for two investment projects, only one of which may be chosen. Project X Project Y £ _ Initial outlay 200,000 180,000 Profit for year 1 65,000 35,000 2 65,000 35,000 3 75,000 65,000 4 35,000 85,000 Estimated resale value at end of year 4 60,000 40,000 Profit is calculated after deducting straight line depreciation. The business has a cost of capital of 10%. Required a) Calculate for each project i. Payback Average Return on Capital Employed Net present value (NPV) ii. iii. b) Critically discuss the merits and limitations of payback and NPV (Your answer is to be presented in an essay format NOT Bullet Points)
- Question 3 Simpson Ltd is an engineering company and is currently considering whether to accept one of the two mutually exclusive investment projects, namely project Bart and project Liza. The following are the Net Cash Flows of these two projects: Year Initial Investment 123 4 5 6 Project Bart £ (525,000) 260,000 (50,000) 302,000 240,000 194,000 125,000 Project Lisa £ (330,000) 80,000 162,000 180,000 145,000 81,000 a) Calculate the payback period for both projects and suggest which project (if any) is worthwhile if it is the company's policy not to take on a project with a payback period longer than 3 years. b) Briefly discuss the main reasons why, despite its numerous drawbacks, payback still remains a widely used technique for investment appraisal. c) Calculate the Net Present Value (NPV) for project Bart and project Lisa and recommend which project the company should invest in (if any), giving your reasons. The cost of capital 10%. d) You are told that at a cost of capital of 28%,…QUESTION 23 Reno Company is considering a project that has the following cash flow data. What is the project's IRR? Year Cash flows O a. 14.05% O b. 15.61% OC. 17.34% O d. 19.27% O e. 21.20% 0 -$1,050 1 $400 2 $400 3 $400 4 $400Q/find total Net cashflow after Таax The following offshore oil development project is being proposed. What would be your approach to address the opportunity ? Production Data : First Oil beginning of Year 3 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Annual Oil Production 5 15 15 10 2.5 1.0 0.5 Technical Costs Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Platform 30 30 Facilities 15 30 Tangible Drilling 10 15 10 4 Intangible Drilling 20 32 15 5 Fixed Opex 14 15 15 15 15 15 Variable Opex US$ 0.40/bbl produced Oil Price forecast : US$ 20/bbl, expected to remain constant thereafter : Royalty 25% Tax rate 20%, Tax losses not allowed Capital Allowance - Straight line at 25% p.a., Only start after First Oil production Terms and Conditions
- QUESTION THREE Bates Limited is considering investing in two capital investment projects. The expected capital expenditure and its related cash flows is given in the table below Details Period Project A (K) Project B (K) Cash Expenditure At outset 410,000 500,000 Cash inflow Year 1 140,000 170,000 Cash inflow Year 2 170,000 195,000 Cash inflow Year 3 135,000 180,000 Cash inflow Year 4 110,000 140,000 Your company considers its cost of capital to be 13%. For Project B, assessed as the riskier project of the two, a risk-adjusted cost of capital of 15% is considered appropriate. Base rate is presently 5% and the company pays a margin of 1%, giving an all in borrowing rate of 6%. Inflation is presently 3%. (a) Assess the two projects using the investment appraisal technique of internal rate of return (IRR). (b) State which project you would recommend to your board and explain in detail your reasons. (c) Besides the IRR…Question 14 Simms Corp. is considering a project that has the following cash flow data. What is the project's IRR? Year Cash flows O 9.64% O 11.76% O 10.82% O 12.58% O 11.29% 0 -$1,025 1 $425 2 $425 3 $425Coffer Company is analyzing two potential investments. Project X Cost of machine Net cash flow: Year 1 Year 2 $ 85,470 Project Y $ 65,000 33,000 33,000 3,000 30,000 Year 3 Year 4 33,000 0 • 30,000 25,000 If the company is using the payback period méthod, and it requires a payback period of three years or less, which project(s) should be selected? Multiple Choice Project Y. Project X. Both X and Y are acceptable projects. Neither X nor Y is an acceptable project.
- QUESTION 8 The INTERNAL RATE OF RETURN for the project shown above is: O 3.92% O 13.25 O 15.17% 9 21.22% O No IRR QUESTION 9Porter Company is analyzing two potential investments Initial investment Net cash flow: Year 1 Year 2 Year 3 Year 4 Project X Project Y $ 75,900 $ 64,000 26,000 26,000 26,000 4,400 28,000 28,000 20,000 If the company is using the payback period method, and it requires a payback of three years or less, which project(s) should be selected? 0QUESTION 10 A company is considering two mutually exclusive projects that have the following cash flows: Project A Project B Year 0 1 2 3 4 Cash Flow -$10,000 1,000 2,000 6,000 6,000 Cash Flow $8,000 7,000 1,000 1,000 1,000 If the company's required rate of return is 10%, find the project's NPV, IRR, PI, and payback period. Which project they should invest in? B because it has the highest IRR of 15.71% O Abecause it has the highest Pl of 1 12 QUESTION 11 A because it has the highest NPV of 1,167 95 OB becasue it has the lowest payback of 2 years