Chapter P4, Problem 2Q

Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in the following table Cash flows                              Project A           Project B                Project CInitial investment (CF0)           $60,000            $100,000                $110,000Cash inflows (CFt), t = 1 to 5   $20,000            $ 31,500                 $ 32,500 e. Calculate the internal rate of return (IRR) for each project. f. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.

How should the capital structure weights used to calculate the WACC be determined? Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital for average-, high-, and low-risk projects? If Congress increased the personal tax rate on interest, dividends, and capital gains but simultaneously reduced the rate on corporate income, what effect would this have on the average company’s capital structure? If a firm goes from zero debt to successively higher levels of debt, why would you expect its stock price to rise first, then hit a peak, and then begin to decline?

Consider the following cash flows of two mutually exclusive projects for Dubai Company. Assume the discount rate for Dubai Company is 10 percent.   Required: Based on the payback period, which project should be taken? Based on the NPV, which project should be taken? Based on the IRR, which project should be taken? Based on this analysis, is incremental IRR analysis necessary? If yes, conduct the analysis.

Which of the following is matter if a U.S. parent firm plans to completely finance the establishment of its British subsidiary with existing funds from retained earnings. The discount rate of the NPV from the project would be affected by ______. A. the parent's cost of capital B. the sales volume of the subsidiary C. the economic conditions D. the cost of borrowing

One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies. Consider this case: Sacramone Products Co. is a U.S. firm evaluating a project in Australia. You have the following information about the project: • The project requires an investment of AU$1,230,000 today and is expected to generate cash flows of AU$1,200,000 at the end of each of the next two years. • The current exchange rate of the U.S. dollar against the Australian dollar is $0.7877 per Australian dollar (AU$). • The one-year forward exchange rate is $0.8109 / AU$, and the two-year forward exchange rate is $0.8455 / AU$. • The firm’s weighted average cost of capital (WACC) is 9%, and the project is of average risk.   What is the dollar-denominated net present value (NPV) of this project? $933,397   $777,831   $738,939   $855,614

Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and subsequent cash inflows associated with these projects are shown in the following table attached: a. Calculate the payback period for each project. b. Calcuate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 13%. c. Calculate the internal rate of return (IRR) for each project. d. Indicate which project you would recommend.

The Textile Manufacturing Company Ltd. is considering one of two mutually exclusive proposals, Projects M and N which require cash outlays of Rs. 8,50,000 and Rs. 8,25,000 respectively. The certainty-equivalent (C.E.) approach is used in incorporating risk in capital budgeting decisions. The current yield on government bonds is 6% and this is used as the risk-free rate. The expected net cash flows and their certainty equivalent are as follows:       Year-ended Project M Project N Cash flow (Rs) Certainty equivalent Cash flow (Rs) Certainty equivalent 1 4,50,000 0.8 4,50,000 0.9 2 5,00,000 0.7 4,50,000 0.8 3 5,00,000 0.5 5,00,000 0.7   Present value factors of Rs.1 discounted at 6% at the end of year 1, 2 and 3 are 0.943, 0.890 respectively. Required: (i)        Which project should be accepted? (ii)       If risk adjusted discount rate method is used, which project would be appraised with a higher rate.

Which of the following is a function of the primary capital market  a.To allow the Foreign Institutional Investors (Fils) to invest in the Indian capital markets b To allow the companies to raise funds to meet their short term funds requirements through new securities c. To provide a market for trading with the outstanding long term securities d. To provide a market for trading with the existing short term securities

MAN LTD  is considering which of two mutually exclusive project it should undertake to expand its covidex production considering the booming business. The finance director thinks that the project with the higher NPV should be chosen, whereas the managing director thinks that the one with the higher IRR should be undertaken, especially as both projects have the same initial outlay and length of life. The company anticipates a cost of capital of 10%, and the net after tax cash flows of the projects are as follows:   Year Project M Project N   “000” “000” 0 (200) (200) 1 35 218 2 80 10 3 90 10 4 75 4 5 20 3   Required:                 Calculate the Internal Rate of Return for Project M and Project N    and Recommend, with technical reasons, which project you would undertake (if any)  . “Net present value has been rated by majority of the financial experts as the most reliable project appraisal technique.” Do you agree…