Ultimate Company, a socially responsible multinational entity, decided to construct a tunnel that will link two sides of the village that were separated by a natural disaster years ago. Realizing its role as a good corporate citizen, the entity has been in this village a couple of years exploring oil and gas in the nearby offshore area. The tunnel would take two years to build and the total capital outlay needed for the construction would not be less than P20,000,000. To allow itselfa margin of safety, the entity borrowed P25,000,000 from three sources and used the extra P5,000,000 for working capital purposes. Financing was arranged as follows: - 7% Bank term loan Institutional borrowing - 8% Corporate bonds 5,000,000 10,000,000 10,000,000 - 9% In the first phase of the construction of the tunnel, there were idle funds of P10,000,000 which the entity invested for a period of six months. Income from this investment was P500,000. What amount of borrowing costs should be capitalized as cost of the asset?

Ultimate Company, a socially responsible multinational entity, decided to construct a tunnel that will link two sides of the village that were separated by a natural disaster years ago. Realizing its role as a good corporate citizen, the entity has been in this village a couple of years exploring oil and gas in the nearby offshore area. The tunnel would take two years to build and the total capital outlay needed for the construction would not be less than P20,000,000. To allow itselfa margin of safety, the entity borrowed P25,000,000 from three sources and used the extra P5,000,000 for working capital purposes. Financing was arranged as follows: - 7% Bank term loan Institutional borrowing - 8% Corporate bonds 5,000,000 10,000,000 10,000,000 - 9% In the first phase of the construction of the tunnel, there were idle funds of P10,000,000 which the entity invested for a period of six months. Income from this investment was P500,000. What amount of borrowing costs should be capitalized as cost of the asset?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 12P: After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide...

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After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend 900,000 for new mining equipment and pay 165,000 for its installation. The mined gold will net the firm an estimated 350,000 each year for the 5-year life of the vein. CTCs cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. a. What are the projects NPV and IRR? b. Should this project be undertaken if environmental impacts were not a consideration? c. How should environmental effects be considered when evaluating this or any other project? How might these concepts affect the decision in part b?
Friedman Company is considering installing a new IT system. The cost of the new system is estimated to be 2,250,000, but it would produce after-tax savings of 450,000 per year in labor costs. The estimated life of the new system is 10 years, with no salvage value expected. Intrigued by the possibility of saving 450,000 per year and having a more reliable information system, the president of Friedman has asked for an analysis of the projects economic viability. All capital projects are required to earn at least the firms cost of capital, which is 12 percent. Required: 1. Calculate the projects internal rate of return. Should the company acquire the new IT system? 2. Suppose that savings are less than claimed. Calculate the minimum annual cash savings that must be realized for the project to earn a rate equal to the firms cost of capital. Comment on the safety margin that exists, if any. 3. Suppose that the life of the IT system is overestimated by two years. Repeat Requirements 1 and 2 under this assumption. Comment on the usefulness of this information.
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In a small seaside community called Reform Village, a huge company is proposing to enterone of two projects. Project A is to build a five-storey hotel on the pristine beachfront ofReform Village. Project B is to build twenty self- contained log cabins along the beach withan additional two cabins for a restaurant and health spa.Each project requires an initial investment of $2 000 000 and has no salvage value. Theinvesting company estimates the cost of capital to be 10%. The company must choose eitherproject A or Project B. The following cash flows are projected for Project A and Project Bover five yearsYear Project A Project B2000 $600 000 02001 600 000 400 0002002 600 000 400 0002003 600 000 1 000 0002004 600 000 1 800 000Additional InformationThe citizens of Reform Village are divided over which project will benefit the…