Answered: Project X Cash flows 150,000 60,000…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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X construction is considering two projects to develop. The estimated net cash flow from each project is as follows:YearProject X ($)Project Y ($)1110,00075,000265,000150,0003100,00060,0004115,00055,000535,00060,000Total425,000400,000Each project requires an investment of $ 200,000. The cost of capital is 10%.Require toa) Calculate Net Present Value, Payback period, ARR and Profitability Index.b) Which Project is to be recommended to develop based on NPV, Profitability Index, Payback period and ARR? Suggest
The project's NPV? WACC: 10.00% Year 0 1 2 3 Cash flows -$1,000 $450 $460 $470
Ch 5. The following project has cash flows as follows: Year Project A 0 -$705,000 1 $225,000 2 $421,500 3 $275,000 What is the IRR? Round to one place past the decimal point and format as "XX.X"
Cash Flow (1,650,000) 330,000 365,000 380,000 415,000 405,000 370000 294,000 Insert your answer. 5. If a company has a required rate of return of 15%, should the following project be accepted based on these expected cash flows below?
Exhibit 9-2The following data are projected for a possible investment project: 1 2 3 4 Revenues $130,000 $150,000 $170,000 $190,000 Cost of Goods Sold $ 32,000 $ 38,000 $ 44,000 $ 50,000 Depreciation $ 70,000 $ 50,000 $ 30,000 $ 10,000 EBIT $ 28,000 $ 62,000 $ 96,000 $130,000 Refer to Exhibit 9-2. The project requires an initial investment of $340,000. Working capital is anticipated to be variable at 13% of revenues; the working capital investment must be made at the beginning of each period, and will be recaptured in full at the end of year 4. The tax rate is 38%.What is the initial cash outlay? Group of answer choices $356,900 $276,900 $264,900 $344,900
Exhibit 9-2The following data are projected for a possible investment project: 1 2 3 4 Revenues $130,000 $150,000 $170,000 $190,000 Cost of Goods Sold $ 32,000 $ 38,000 $ 44,000 $ 50,000 Depreciation $ 70,000 $ 50,000 $ 30,000 $ 10,000 EBIT $ 28,000 $ 62,000 $ 96,000 $130,000 Refer to Exhibit 9-2. The project requires an initial investment of $340,000. Working capital is anticipated to be variable at 13% of revenues; the working capital investment must be made at the beginning of each period, and will be recaptured in full at the end of year 4. The tax rate is 38%.What is the net cash flow to the firm in year 1? Group of answer choices $62,400 $86,760 $5,400 $84,760 $300
Question 16 The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted. Project:                                         A                                 B                                C      . Initial cost                               R100 000                    R115 000                    R90 000 Expected life                               5 years                         5 years                         4 years Scrap value                               R5 000                        R7 500                          R4 000 Cash-inflows                                  R                                 R                                 R End year 1                                   40 000                         50 000                        27 500                2                                   35 000                         35 000                        32 500…
Payback Machine X Cumulative cash flow Machine Y Cumulative cash flow Investment 1,000,000 1,000,000 (1,000,000) (1,000,000) Year 1 $500,000 (500,000) $200,000 (800,000) Year 2 $500,000 0 $300,000 (500,000) Year 3 $300,000 $500,000 0 Year 4 $100,000 $500,000 Payback 2 years 3 years ARR Machine X ARR =       Average Profit              Average investment Therefore: Depreciation (1000, 000-200,000) /4 = 200000                                             = 200,000X 4 = 800,000 Profits before depreciation 1400,000 Less depreciation                (800,000)            Accounting Profit                600,000 Average profits 600,000/4yrs =150,000 Average investment = (initial investment + residual value)/2                                  =     (1,000,000 + 200,000)/2 = 600,000 (Average profit/ average investment) X 100    = (150,000/600,000) X 100 = 25% Machine Y…
Question 15 The following information relates to three possible capital expenditure projects. Because of capital rationing only one project can be accepted. Project:                                         A                                 B                                C      . Initial cost                               R100 000                    R115 000                    R90 000 Expected life                               5 years                         5 years                         4 years Scrap value                               R5 000                        R7 500                          R4 000 Cash-inflows                                  R                                 R                                 R End year 1                                   40 000                         50 000                        27 500                2                                   35 000                         35 000                        32 500…
Look at the cash flows for projects F and G given below. Cash Flows($) Project C0 C1 C2 C3 C4 C5 C6 C7 C8 IRR (%) NPV at 10% F (8,000 ) 5,200 5,200 5,200 0 0 0 0 0 42.6 4,932 G (8,000 ) 2,600 2,600 2,600 2,600 2,600 2,600 2,600 2,600 28.0 5,871 The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the forecast for each cash flow from each project should be reduced by 8%. But a lazy financial manager, unwilling to take the time to argue with the projects’ sponsors, instructs them to use a discount rate of 18%.
P10–12 Payback and NPV Neil Corporation has three projects under consideration. The cash flows for each project are shown in the following table. The firm has a 16% cost of capital. Project A Project B Project C Initial investment (CF0) −$40,000 −$40,000 −$40,000 Year (t) Cash inflows (CFt) 1 $13,000 $ 7,000 $19,000 2 13,000 10,000 16,000 3 13,000 13,000 13,000 4 13,000 16,000 10,000 5 13,000 19,000 7,000 Calculate each project’s payback period. Which project is preferred according to this method? Calculate each project’s net present value (NPV). Which project is preferred according to this method? Comment on your findings in parts aand b, and recommend the best project. Explain your recommendation.
Question 3: Juhayna Food Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in the following table. Cash flow Project A Project B Project C Initial Investment 100000 120,000 130,000 Year 1 Cash Inflows 30000 36,500 38000 Year 2 cash inflows 35000 45000 20000 Year 3 cash inflows 40000 40000 42000 Year 4 cash inflows 38000 35000 45000 Year 5 cash inflows 20000 30000 50000 Taking into consideration that the cost of debt 7% , cost of preferred stock 12% and cost of new common stock 15%. The weight of each source of capital are long term debt 30% , preferred stock 20% and common stock equity 50%. TO dO Create a spreadsheet to answer the following questions: Calculate the firm‘s cost of capital ( WACC) Calculate the payback period for each project. Calculate the net present value (NPV) of each…

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Project X Cash flows 150,000 60,000 40,000 30,000 80,000 40,000 Project Y Cash flows 150,000 60,000 35,000 35,000 60,000 20,000 Year (Initial Investment) 1 3 4