International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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A company with a WACC of 14% is evaluating two projects for this year. The following is the estimated cash flow after deducting tax, including depreciation, as follows: (on the image below)
a. Calculate the NPV, IRR, and payback, for each of these projects.b. If it were assumed that the two projects were independent, which project would you recommend?c. If the two projects were mutually exclusive, which project would you recommend?
The CFO of Expansion Group Ltd. has been presented with an opportunity to undertake a 7-year project in Turkey. As an emerging market, some incentives are available for foreign direct investment (FDI) in the country and she would like to evaluate this proposal.The following data is available for the evaluation of the project:
The project investment is expected to cost £3,500,000, payable at the start of the project. Of this amount, £3,000,000 is a capital investment, with the remainder required for set up costs and other project related expenses. (Ignore depreciation for the purpose of this exercise.)The after-tax cash inflows have been estimated at £800,000 per year for the duration of the project. An opportunity cost of expansion in the UK has been identified and valued at £725,000.Costs for a visit to Turkey to evaluate the location and for meetings with the Turkish investment authority (ISPAT) have been recorded as £50,000.The company is publicly traded and the βeta of its stock is…
Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?
Group of answer choices
Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost.
The company spent and expensed $10 million on a marketing study before its current analysis regarding whether to accept or reject the project.
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.
The new project is expected to reduce sales of one of the company's existing products by 5%.
The company has spent and expensed $1 million on R&D associated with the new project.
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- Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should be considered when cash flows are estimated? If the item should not be included, explain why not.A) Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost.B) The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment.C) The company has spent for tax purposes $3 million on research related to the new product. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future.D) The new product will cut into sales of some of the firm's other products.E) The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million…arrow_forward1. Abdullah bin Ahmad has entered into a Mudarabah contract with Bank Amanah Berhad in which he provides monetary capital of $500,000 to be managed and invested by the Bank. The Bank provides Al-Mudharabah Moqayadah investment account facility to Abdullah whereby the Bank will invest in a specific project as agreed by the client. For this project there are two other investors, Hashim and Ibrahim who have invested $500,000 and $200,000 respectively. The profit sharing between four of them is 5:5:2:2 for Abdullah, Hashim, Ibrahim, and the Bank respectively. The Bank has entered into another Mudarabah contract (ReMudaraba) with Al Majd Development Berhad to undertake manufacturing project and they agreed on the profit sharing ratio of 70:30 (Bank: Al Majd). You are required to determine the profit or loss to be shared at the end of the contract by the five parties involved above if: i. Profit $550,000 ; or ii. Loss $350,000. 2. Bank Ahsan Berhad contributed $2,000,000 for a five-year…arrow_forwardThe U.S. government is considering building apartments for its employeesworking in a foreign country and currently living in locally owned housing. A comparison of two possible buildings indicates the following: Assume the salvage or sale value of the apartments to be 60% of the firstinvestment. Use 10% and a 20-ycar study period to compute the B/C ratio onincremental investment, and make a recommendation as to the best option. (Do not assume a do-nothing alternative.)arrow_forward
- The Company is considering two independent projects. One project involves a new product line, and the other involves the acquisition of a special equipment for the Materials Handling Department. The projected annual operating revenues and expenses are as follows: 1. How much is the after tax cash flows of Project 1? 2. How much is the net benefit of investing in Project 2?arrow_forwardAs a financial consultant, you have contracted with Wheel Industries to evaluate their procedures involving the evaluation of long term investment opportunities. You have agreed to provide a detailed report illustrating the use of several techniques for evaluating capital projects including the weighted average cost of capital to the firm, the anticipated cash flows for the projects, and the methods used for project selection. In addition, you have been asked to evaluate two projects, incorporating risk into the calculations.You have also agreed to provide an 8-10 page report, in good form, with detailed explanation of your methodology, findings, and recommendations. Company Information Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of…arrow_forwardSupervenes is a freight delivery company, it uses the internal rate of return (IRR) to select projects. The treasurer was presented with an opportunity to invest in project Sigma which requires an initial investment of $20,000 and generates cash inflows of $8,000 per year for 5 years. The cost of capital is 10%. Required: Calculate the IRR for the Sigma project and advice if the project should be taken. The full calculation must be shown for marks.arrow_forward
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