Concept explainers
Relevant Cash Flows [LO1] Parker & Slone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $3.5 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $3.9 million. The company wants to build its new manufacturing plant on this land; the plant will cost $16.7 million to build, and the site requires $850,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? Why?
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FUND. OF CORPORATE FIN. 18MNTH ACCESS
- 2. Project 2: investing $11 million to develop add-ons to existing products a. these add-ons to existing products are expected to generate $1.5 million positive cash flow every year thereafter on both new and existing products b. Calculate NPV. c. What is payback, PI, and IRR? What decisions should be made? d. If Skyhawk's management decided that they only need to collect their initial investment within 8 years on this project, should they invest? The rate of return = 8.28%arrow_forwardQ.2 Krishna India owns an oil pipeline which will generate Rs. 12 crore of cash income inthe coming year. It has a very long life with virtually negligible operating cost. Thevolumeof shipped, however, will decline over time and, hence, cash flows willdecrease by 3% per year. The Discount rate is 12%.a. If the pipeline is used forever, what is the present value of its cash flows?b. If the pipeline is scraped after 25 years, what is the present value of its cashflows?arrow_forward5. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project? a. The company has spent and expensed $1 million on R&D associated with the new project b. The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year c. The new project is expected to reduce sales of one of the company's existing products by 5%arrow_forward
- A3 5b 5. We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1500, and will yield $800 of cash inflows for the next three years. Project B requires an initial investment of $5000, and will yield $1,500 of cash inflows for the next five years. The required return on each project is 10%. b. What is the problem with using the NPV investment criterion in this case? What alternative criterion should be used?arrow_forwardA3 5c. 5. We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1500, and will yield $800 of cash inflows for the next three years. Project B requires an initial investment of $5000, and will yield $1,500 of cash inflows for the next five years. The required return on each project is 10%. c. Which project should be chosen?arrow_forwardMf2. Your firm is considering choosing either Project X or Project Y with the following cash flows: Year: 0. 1 2 3 4 Project X -$150,000 $75,000. $65,000 55,000 $45,000 Project Y -$180,000 $90,000. $70,000 $70,000 $50,000 Between a discount rate of ______ and ______ you can be sure your firm should prefer Project Y to Project X. a. 0%; 14.16% b. 0%; 10.25% c.14.16%; 24.26% d10.25; 22.63% e. 0%; 25%arrow_forward
- ch 12 #5 The management of Kunkel Company Is considering the purchase of a $26,000 machine that would reduce operating costs by $6500 per year. At the end of the machines five-year useful life, it will have zero salvage value. The companies required rate of return is 16%. 1) determine the net present value of the investment on the machine. 2) what is the difference between the total, undiscounted cash inflows and cash out flows over the entire life of the machine?  Can you show me how to do this? Also, i don’t know which chart I’m supposed to use.arrow_forwardQ6) IBM networks want to modernize their networking system. Proposals have been received from two major software companies. The first proposal cost $6million but will raise the firm’s annual cash flows by $3million. The second proposal cost $7million and provides cash flow of $3.5million a year. Both projects have a life span of 3 years. Assuming that the cost of capital is 8%, which proposal may be recommended on the basis of Net Present Value criteria.arrow_forwardA3 5 g 5. We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1500, and will yield $800 of cash inflows for the next three years. Project B requires an initial investment of $5000, and will yield $1,500 of cash inflows for the next five years. The required return on each project is 10%. The cash flows and required return given are all in nominal terms. Given that the inflation rate is 3%, answer the following questions: g. Which project should be chosen based on the real cash flows and real rate of return?arrow_forward
- H2. .  Time remaining: 00:09:29 Finance You own a coal mining company and are considering opening a new mine. The mine itself will cost $120 million to open. If this money is spent immediately, the mine will generate $22 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.8 million per year in perpetuity. What does the IRR rule say about whether you should accept this opportunity? (Hint: Consider the number of sign changes in the cash flows.) If the cost of capital is 7.6%, what does the NPV rule say? Question content area bottom Part 1) What does the IRR rule say about whether you should accept this opportunity? (Select the best choice below.) A. Accept the opportunity because the IRR is greater than the cost of capital. B. There are two IRRs, so you cannot use the IRR as a criterion for accepting the opportunity. C. Reject…arrow_forwardA3 5e 5. We have two independent and mutually exclusive projects, A and B. Project A requires an initial investment of $1500, and will yield $800 of cash inflows for the next three years. Project B requires an initial investment of $5000, and will yield $1,500 of cash inflows for the next five years. The required return on each project is 10%. The cash flows and required return given are all in nominal terms. Given that the inflation rate is 3%, answer the following questions: e. What are the real cash flows from Project A and Project B?arrow_forwardQ No. 3 A construction company is deciding to undertake a project. The project is quite profitable as it will generate net cash inflows of $20 million per year for 5 years. However, it will cause pollution to the nearby residents. The company can mitigate this pollution by investing additional 10 million at Year 0 but legally it is not compulsory for it to do so. Undertaking this project would cost $60 million without mitigation. If the firm does invest in mitigation, the annual cash inflows would be $22 million. The risk adjusted WACC is 12%. A) Calculate the NPV and IRR with and without mitigation. B) Should the project be undertaken? If so, should the firm do mitigation?arrow_forward
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