a.
To construct: NPV profile for the given project.
Introduction:
Capital Budgeting:
It refers to the long-term investment decisions that has been taken by the top management of a company and that are irreversible in nature. These decisions require investment of large amount of cash of the company.
It is a method under capital budgeting which includes the computation of the net present value of the project in which company is investing. The calculation is done by calculating the difference between the value of
b.
To explain: Whether the project should be accepted or not at 10% WACC and 20% WACC.
c.
To identify: A situation where the negative cash flows during or at the last of the project’s life might lead to multiple
Introduction:
Internal Rate of Return (IRR):
It refers to the rate of return that is computed by the company to make a decision of selection of a project for investment. This rate provides the basis for selection of projects with a lower cost of capital and rejection of project with a higher cost of capital.
d.
To calculate: MIRR of the project at 10% and 20% WACC.
Introduction:
Modified Internal
It refers to the rate of return that is computed by the company to make a decision of selection and ranking of a project for investment. This is a modified version of IRR with reinvestment of cash flows at the cost of capital.
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Chapter 11 Solutions
Fundamentals of Financial Management (MindTap Course List)
- The Ulmer Uranium Company is deciding whether or not to open a strip mine whose net cost is $4.4 million. Net cash inflows are expected to be $27.7 million, all coming at the end of Year 1. The land must be returned to its natural state at a cost of $25 million, payable at the end of Year 2. Plot the project’s NPV profile. Should the project be accepted if r = 8%? If r = 14%? Explain your reasoning. Can you think of some other capital budgeting situations in which negative cash flows during or at the end of the project’s life might lead to multiple IRRs? What is the project’s MIRR at r = 8%? At r = 14%? Does the MIRR method lead to the same accept-reject decision as the NPV method?arrow_forwardGallant Sports s considering the purchase of a new rock-climbing facility. The company estimates that the construction will require an initial outlay of $350,000. Other cash flows are estimated as follows: Assuming the company limits its analysis to four years due to economic uncertainties, determine the net present value of the rock-climbing facility. Should the company develop the facility if the required rate of return is 6%?arrow_forwardRedbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?arrow_forward
- Question 1. The management of Fine Electronics Company is considering to purchase an equipment to be attached with the main manufacturing machine. The equipment will cost Gh¢6,000 and will increase annual cash inflow by Gh¢2,200. The useful life of the equipment is 6 years. After 6 years it will have no salvage value. The management wants a 20% return on all investments. a. Compute net present value (NPV) of this investment project. b. Should the equipment be purchased according to NPV analysis?arrow_forwardCoffer 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.arrow_forwardSollve the Engineerng Economics Problem: Project Feasibility Indicator An agricultural equipment was purchased at PhP1.75M has a resale value of PhP900000 whenever it is sold. The use of the equipment would generate annual profit of Php218000. If money cost 8% per year, determine the payback period. If the asset equipment will only be used for twelve years, should it be purchased?arrow_forward
- Porter Company is analyzing two potential Investments. Project X $ 97,090 Initial investment Net cash flow: Year 1 Year 2 Year 3 Year 4 Multiple Choice 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? O 32,500 32,500 32,500 0 Both X and Y are acceptable projects. O Project Y. Project Y $ 77,000 Project Y because it has a lower Initial Investment. Project X 5,700 34,500 34,500 25,000 Neither X nor Y is an acceptable project.arrow_forwardClear my choice The total investment required for a project is estimated at OMR100, 000. The cash flows expected from project for the first four years are given below Year Project A Year 1 25,000 Year 2 38,500 Year 3 42,000 Year 4 48,000 What will be pay back period? 2.86 O b. B.23 c. 3.03 d. 2.63 All the options are wrong o search Tenovo 近arrow_forwardQuestion: The management of Fine Electronics Company is considering to purchase an equipment to be attached with the main manufacturing machine. The equipment will cost $6,000 and will increase annual cash inflow by $2,200. The useful life of the equipment is 6 years. After 6 years it will have no salvage value. The management wants a 20% return on all investments. Required: Compute net present value (NPV) of this investment project. Should the equipment be purchased according to NPV analysis? DONOT SOLVE ON EXCELarrow_forward
- Perit Industries has $155,000 to invest in one of the following two projects: Cost of equipment required Working capital investment required Annual cash inflows Salvage value of equipment in six years Life of the project Project A $ 155,000 $ 25,000 $ 8,600 6 1. Net present value project A 2. Net present value project B 3. Which investment alternative (if either) would you recommend that the company accept? X Answer is complete but not entirely correct. Project B $0 $ 155,000 $ 40,000 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the net present value of Project A. Note: Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount. 2. Compute the net present value of Project B. $(53,971) 70,527 X Project B $0…arrow_forwardQuestion 2: SABIRCO wants to investigate the following project. Initial investment $1,000,000 Annual income $200,000 in year 1 and increase every year by 40,000. No salvage value MARR = 10% a) What is the discounted payback period? b) Assuming the project to be used for 8 years. What is the end balance of the project at end of year 8?arrow_forwardNPV Calculate the net present value (NPV) for a 30-year project with an initial investment of $45,000 and a cash inflow of $8,000 per year. Assume that the firm has an opportunity cost of 18%. Comment on the acceptability of the project. The project's net present value is $ (Round to the nearest cent.) Text ia Librai Calculat Resource Enter your answer in the answer box and then click Check Answer, Check Answer ic Study es Clear All part remaining unication Tools 10:11 4/19/ P Type here to search insert f10arrow_forward
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