Chapter 14, Problem 13QA

Capital Budgeting: Natural Organics Products, a company with profitable ongoing operations, is considering a major six-year project on which the company has already incurred $1,200,000 in research and development costs. The vice-president in charge of finance has provided you with the following data and worksheet and has asked you to determine, using an NPV analysis, if the project should be undertaken. She has also hinted that your future with the company hinges on a successful analysis of the project. Data Sheet: Company’s tax rate = 40% Company’s opportunity cost of capital = 15% Net working capital requirements of the project if it is accepted: Year 0 $160,000 Year 1 $240,000 Year 2 $240,000 Year 3 $240,000 Year 4 $180,000 Year 5 $50,000 Year 6  $0 New equipment purchases required for the project total $14,000,000. At the end of the project, it is expected that the equipment can be sold to a competitor for $2,000,000. This equipment would be placed in the company’s in the…

Basic Capital Budgeting Techniques Answer each independent question, (a) through (e).a. Project A costs $5,000 and will generate annual after-tax net cash inflows of $1,800 for 5 years.What is the payback period (in years, rounded to 2 decimal places) for this investment under theassumption that the cash inflows occur evenly throughout the year?b. Project B costs $5,000 and will generate after-tax cash inflows of $500 in year 1, $1,200 in year2, $2,000 in year 3, $2,500 in year 4, and $2,000 in year 5. What is the payback period (in years,rounded to 2 decimal places) for this investment assuming that the cash inflows occur evenlythroughout the year?c. Project C costs $5,000 and will generate net cash inflows of $2,500 before taxes each year for 5years. The firm uses straight-line depreciation with no salvage value and is subject to a 25% taxrate. What is the payback period (in years, and rounded to 2 decimal places) under the assumptionthat all cash inflows occur evenly throughout the…

Capital budgeting         Mrs. Alis is an intelligent business woman. She makes her investments after a very thoughtful process. In January 2018 , her manager has shown her some projects with the following details   Option A Investment into a towel business that initially cost $200,000 and then will generate cash inflow of $24000 per year for the next 10 years   Option B Investment into a detergent business that initially cost $190,000 and then will generate cash inflow of $20,000 for each of next 12 years.   The rate of return associated with both the investments is 12%.   Calculate net present value (NPV) and internal rate of return (IRR) of both the investments. Comment on which investment Mrs Alis should pick on the basis NPV and IRR.

Working capital and capital budgeting. ​ Farbuck's Tea Shops is thinking about opening another tea shop. The incremental cash flow​ (not including the working capital​ investment) for the first five years is as​ follows:   Initial capital cost=​$3,500,000 Operating cash flow for each year=​$1,000,000 Recovery of capital assets after five years=​$260,000     The hurdle rate for this project is 12​%. If the initial cost of working capital is ​$490,000 for items such as​ teapots, teacups,​ saucers, and​ napkins, should​ Farbuck's open this new shop if it will be in business for only five​ years? What is the most it can invest in working capital and still have a positive net present​ value?     Should​ Farbuck's open this new shop if it will be in business for only five​ years?  ​(Select the best​ response.)   A.Yes.  Farbuck's should open the new shop because the project's NPV is $40,346.   B.No.  Farbuck's should not open the new shop because the project's NPV is…

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of​ 12% to evaluate this project. Based on extensive​ research, it has prepared the following incremental cash flow​ projects:   Year 0 1 2 3 Sales​ (Revenues) 100,000 100,000 100,000 −Cost of Goods Sold​ (50% of​ Sales) 50,000 50,000 50,000 −Capital Cost Allowance 13,500 22,950 16,065 =EBIT 36,500 27,050 33,935 −Taxes ​(35%) 12,775 9,468 11,877 =Unlevered net income 23,725 17,582 22,058 +Capital Cost Allowance 13,500 22,950 16,065 +Changes to working capital −5,000 −5,000 −10,000 −Capital Expenditures −90,000     The free cash flow for the first year of​ Epiphany's project is closest​ to: A. ​$35,532 B. ​$45,000 C. ​$32,225 D. ​$25,000 E. ​$43,000

Capital Budgeting – Kogan.com Ltd.  All amounts are in $AUD. In order to satisfy the sharp increase in demand KGN is evaluating investing in a “Mega Warehouse” project in Australia. KGN has already identified two existing warehouses. In order to mitigate the risk and assess the fit for purpose of these facilities KGN asked “Axiom Ltd.” to conduct a technical due diligence. “Axiom Ltd.” is asking $100,000 as a fixed fee for its consulting services. Project A has an initial outlay of dollars $150 million and Project B has an initial outlay of $85 million. Project A will generate additional revenues of 45 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of $1million immediately, this working capital will be recovered at the end of the project. Project B will generate additional revenues of 25 million starting at the end of year 1 until the end of year 10. It will also incur additional working capital expenses of…