4. Best Toys is building a plant to make fake aquariums for 1-year-olds. In its first year of operation (year 1), the aquarium project creates working capital needs of $6M. From years 1 to 4, these needs are expected to increase by 5%. After five years, the plant will be closed and the working capital recovered. In undertaking a capital budgeting exercise to see whether or not to build the plant, what are the cash flows that should be included to take account of the working capital?
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- Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?Aqua Park can purchase a new dolphin (their old one died) for $5,000. The new dolphin will encourage greater park attendance and therefore increase the annual cash inflow by $2,000 for Years 1, 2, 3, and 4. If the cost of capital for the project is 10%, then what is the profitability index for the project?Blue Demon Cycle Shop is considering the purchase of used mopeds to be rented to city tourists. The mopeds cost $18,922.41 and are expected to produce cash flows of $5,000 per year for 6 years from rental fees. Blue Demon’s cost of capital is 14%. Calculate the projects approximate IRR.
- Morris Glass Company has decided to invest funds for the next 5 years so that development of “smart” glass is well funded in the future. This type of newtechnology glass uses electrochrome coating to allow rapid adjustment to sun and dark in building glass, as well as assisting with internal heating and cooling cost reduction. The financial plan is to invest first, allow appreciation to occur, and then use the available funds in the future. All cash flow estimates are in $1000 units, and the interest rate expectation is 8% per year.Years 1 through 5: Invest $7000 in year 1, decreasing by $1000 per year through year 5 Years 6 through 10: No new investment and no withdrawals. Years 11 through 15: Withdraw $20,000 in year 11, decreasing 20% per year through year 15. Determine if the anticipated withdrawals will be covered by the investment and appreciation plans. If the withdrawal series is over- or underfunded, what is the exact amount available in year 11, provided all other estimates…A garage is installing a new 'bubble-wash' car wash, which requires an initial investment of $280,000 in year 0. It will promote the car wash as a fun activity for the family and it is expected that the novelty of this approach will boost sales in the medium term. The garage plans on using an opportunity cost of capital of 10% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year 1 Year 2 Revenues Costs of Goods Sold Gross Profit Selling, General and Admin Depreciation EBIT Income tax (30%) Profit after tax Changes in NOWC 120 000 -60 000 60 000 -6 000 -70 000 -16 000 4 800 -11 200 The net present value (NPV) for this project is closest to: a. $76,607 b. $119,888 c. -$145,283 d. -$214,525 -5,000 400 000 -200 000 200 000 -6 000 -70 000 124 000 -37 200 86 800 -5,000 Year 3 400 000 -200 000 200 000 -6 000 -70 000 124 000 -37 200 86 800 -5,000 Year 4 300 000 -150 000 150 000 -6 000 -70 000 74 000 -22 200 51 800 -5,000Billabong Tech uses the internal rate of return (IRR) to select projects. Calculate the IRR for each of the following projects and recommend the best project based on this measure. Project T-Shirt requires an initial investment of $ 15,333 and generates cash inflows of $ 7,000 per year for 4 years. Project Board Shorts requires an initial investment of $ 28,500 and produces cash inflows of $ 13,500 per year for 5 years.
- You are considering starting a new doughnut shop in the Prince Kuhio Mall. You wish to complete a cash flow statement to be used for capital budgeting purposes. You will have to purchase $80,000 of equipment with cash you have saved to manufacture the doughnuts. You will purchase the equipment on the day you start the business. You will depreciate the equipment using 3-year straight-line depreciation to a salvage value of $20,000. You will need to have $20,000 of inventory and you will need to have $5,000 in cash for the cash registers. You will need to have the inventory and cash in place the day you start the business and it will remain in place throughout the life of the business. You will owe your suppliers $5,000 at all times, beginning the day that you start the business and continuing through the life of the business. Based on your sales estimate, you believe that you will be able to sell $1,000,000 of doughnuts per year. You have estimated labor costs to be $200,000 for the…A garage is installing a new 'bubble-wash' car wash, which requires an initial investment of $280,000 in year 0. It will promote the car wash as a fun activity for the family and it is expected that the novelty of this approach will boost sales in the medium term. The garage plans on using an opportunity cost of capital of 10% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections: Year 1 Year 2 Year 3 Year 4 Revenues 120 000 400 000 400 000 300 000 -Cost of goods sold -66 000 -206 000 -206 000 -156 000 -Depreciation -70 000 -70 000 -70 000 -70 000 +EBIT -16 000 124 000 124 000 74 000 -Taxes (30%) 4 800 -37 200 -37 200 -22 200 =Profit after tax -11 200 86 800 86 800 51 800 Changes in NOWC -5 000 -5 000 -5 000 -5 000 The net present value (NPV) for this project is closest to: a. -$145,283 O b. $76,607 O c. -$214,525 ○ d. $119,888A nursery would like to build another commercial greenhouse to expand its operations. It estimates that building another greenhouse will cost $180,000. To operate another greenhouse, the nursery estimates an additional labor and utilities will cost $30,000 per year. The greenhouse is expected to produce an additional $60,000 of revenue at the end of year 1; this revenue is expected to increase by $10,000 each year. Choose a cash flow diagram.
- Billabong Tech uses the internal rate of return (IRR) to select projects. Calculate the IRR for each of the following projects and recommend the best project based on this measure. Project T-Shirt requires an initial investment of $26,500 and generates cash inflows of $9,000 per year for 7 years. Project Board Shorts requires an initial investment of $38,333 and produces cash inflows of $12,500 per year for 8 years. The IRR of project T-Shirt is %. (Round to two decimal places.)Assume you are the finance manager of Salalah Mineral Water Company, and the company is considering investing in one of the three projects. The life for the Projects Amal, Sara and Project Farahl is 5 years. Project Amal costs OMR. 17030, and Project Farah costs OMR.17030. The discount rate/cost of capital is 2.55%. Required: Use the following techniques to help company to decide which Machine is better and justify why? a) Payback period b) Discount payback period c) Net Present Value d) Present value index -Profitability index. Year Project Amal Project Fatima 1 7440 8300 2 8096 9609 3 5440 8300 4 9096 9609 9696 9508 LODane Cosmetics is evaluating a new fragrance mixing machine. The machine requires an initial investment of $24,000 and will generate after-tax cash inflows of $5,000 per year for 8 years. For each of the costs of capital listed, (1) calculate the net present value (NPV), (2) indicate whether to accept or reject the machine, and (3) explain your decision. a. The cost of capital is 10%. b. The cost of capital is 12%. c. The cost of capital is 14%.
