1 1(a) 1(b) Jonkin plc are considering a project that is susceptible to risk. An initial investment of £1,300,000 will be followed by six years with the following 'most likely' cash flows (there is no inflation or tax): Annual Sales (volume of 300,000 units multiplied by estimated sales price of £4) Annual Costs Labour Materials Other £ ■ 750,000 100,000 50,000 the sales price; the labour costs; £ 1,200,000 The initial investment of £1,300,000 in machinery and equipment has an estimated residual value of £400,000 at the end of the six-year life of the project. The company calculates depreciation on a straight-line basis. The cost of capital is 8%. (900,000) 300,000 Calculate the net present value of the project. Undertake sensitivity analysis to show by how much the following factors would have to change before the project ceased to be worthwhile: the discount rate; the material costs; and the residual value of the machinery and equipment.

1 1(a) 1(b) Jonkin plc are considering a project that is susceptible to risk. An initial investment of £1,300,000 will be followed by six years with the following 'most likely' cash flows (there is no inflation or tax): Annual Sales (volume of 300,000 units multiplied by estimated sales price of £4) Annual Costs Labour Materials Other £ ■ 750,000 100,000 50,000 the sales price; the labour costs; £ 1,200,000 The initial investment of £1,300,000 in machinery and equipment has an estimated residual value of £400,000 at the end of the six-year life of the project. The company calculates depreciation on a straight-line basis. The cost of capital is 8%. (900,000) 300,000 Calculate the net present value of the project. Undertake sensitivity analysis to show by how much the following factors would have to change before the project ceased to be worthwhile: the discount rate; the material costs; and the residual value of the machinery and equipment.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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5.1.3 Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). INFORMATION Zeda Enterprises has the option to invest in machinery in projects A and B but finance is only available to invest in one of them. You are given the following projected data: Initial cost Scrap value Depreciation per year Net profit Year 1 Year 2 Year 3 Year 4 Year 5 Net cash flows Year 1 Year 2 Year 3 Year 4 Year 5 Project A R300 000 R40 000 R52 000 R20 000 R30 000 R50 000 R60 000 R10 000 Project B R300 000 0 R60 000 R90 000 R90 000 R90 000 R90 000 R90 000
The company WHY is evaluating the possibility of building a warehouse (the project'). It implies an immediate investment cost (year zero) of €350 million. The discounted value (year zero) of expected cash flows is €275 million. However, WHY has the option to further invest €125 million within 1 year, which will enable it to triplicate the warehouse capacity, increasing by 60% the discounted value of cash flows. Assume the following: • Risk free interest rate: 2% per year. • The project gross value follows a multiplicative binomial process. • Method for the computation of remaining relevant inputs: compound annual growth. The market value of the shadow asset is given by S. Currently S = 18 and the estimation is that within 1 year S = 29 and S = 12 for the scenarios of favourable and unfavourable market evolution, respectively. In your answers to the next questions make plausible assumptions if necessary. In case you prefer, standard characters can be used (e.g b rather than B,…
16. A three-year project requires an initial investment of £100,000 and will produce positive net operating cash flows of £40,000, £35,000 and £45,000 in years 1, 2 and 3. The investment has no residual value at the end of the project. The company uses a 10% discount rate and does not currently pay tax. The NPV has been calculated as - £4,690 (i.e. negative). What is the sensitivity of the project decision to changes in the cost of the investment? (a) 0% (b) 4.7% (c) 21.3% (d) 95.3%
A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow -$ 27,600 11,600 14,600 10,600 1 2 If the required return is 18 percent, what is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR % Should the firm accept the project? O No Yes eBook & Resources eBook: 9.5. The Internal Rate of Return Check my work 00
3. Baboki Ltd are planning to invest in a new project which will cost an initial P375 000 and they expect the following cash.Year Net Cash Profits (P)1 25 0002 55 0003 70 0004 80 0005 40 0006 30 000The investment will be depreciated to a scrap value of P175, 000 over the period of the project. Required: Calculate the Accounting Rate of Return (Return on Capital Employed) of the project.
For the given cash flows, suppose the firm uses the NPV decision rule. Year 0 O 23 -$ Cash Flow 150,000 66,000 73,000 57,000 a. At a required return of 10 percent, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. At a required return of 20 percent, what is the NPV of the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. NPV b. NPV
8. An investment opportunity requires an initial cash outlay of £30,000. Cash flows are expected to be as follows: Year 1 Year 2 Year 3 Year 4 (£7,000) (£2,000) £13,000 £36,000 The company’s cost of capital is 9%. Depreciation is to be charged annually on a straight line basis over the life of the project. What is the NPV of the project? a. (£2,579) b. £27,421 c. £2,579 d. (27,421)
7. Assume a company is going to make an investment of $300,000 in a machine and the following are the cash flows that two different products would bring in years one through four. The company's required rate of return is 12%. Option A Option B Product A Product B $190,000 $150,000 190,000 180,000 60,000 60,000 20,000 70,000 Using the appropriate EXCEL spreadsheet in the Chapter11 NPV IRR Analysis.xlsx Download Chapter11 NPV IRR Analysis.xlsx, answer the following questions: What is the NPV for Option A? What is the NPV for Option B? What is the IRR for Option A? What is the IRR for Option B? PLEASE NOTE #1: The dollar amounts will be with "$" and commas as needed and rounded to two decimal places (i.e. $12,345.67). Round your IRR answers, in percentage format, to two decimal places (i.e. 12.34%). Given the above answers, which project should the…
A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Cash Flow -$41,000 20,000 23,000 14,000 Year 2. 3. If the required return is 14 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR Should the firm accept the project? О Аccept CO Reject
A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year 0 1 2 3 Cash Flow IRR -$ 27,500 11,500 14,500 10,500 If the required return is 16 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) % Should the firm accept the project? No O Yes
A company is wondering whether to spend GH¢ 10,000,000 on an item of equipment in order to obtain cash profits as follows. Year GH¢ 1 3,000,000 3,400,000 3 2,400,000 1,800,000 The company requires a return of 20% per annum on this project. a) Calculate : (i) The payback period. (ii) the discounted payback period and (iii) The Net Present Value (NPV) of the project. b) If the Company has set a maximum PayBack Period of 3.5 years, for projects of this type, should this project be accepted? c) Is the Project viable by the NPV method? 2. 4)
13. The IBC Company is considering undertaking an investment that promises to have the following cash flows Period 0 is = -$100 Period 1 is= $150 Period 2 is = $50 Period 3 is = $50 If it waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay Period 1 Period 2 Period 3 −$150 $250 $50 Assume a time value of money of 0.05. Which investment should the firm undertake? Use the present value method and the internal rate of return approaches. With the IRR approach, use the incremental cash flows.

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