FIN490 Week 2 Discussion 1
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Jan 9, 2024
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Let's start by calculating the net investment of the project. The net investment is the initial cash outflow required to start the project. Here are the calculations:
Description
Year 0
Equipment cost
-$600,000
Shipping and installation charges
-$50,000
Initial working capital investment
-$80,000
Total Initial Investment
-$730,000
Now, let's move on to calculating the annual cash flows of the project. Annual cash flows are the net cash inflows or outflows for each year of the project. The calculation is based on incremental revenues, incremental operating costs, depreciation, changes in working capital, and taxes.
Description
Year 1
Year 2
Year 3
Year 4
Year 5
Incremental Revenues
$600,00
0
$700,00
0
$850,000
$700,000
$450,000
Incremental Operating Costs
-
$250,00
0
-
$262,50
0
-$275,625
-
$289,406.2
5
-
$303,876.5
6
Depreciation
-
$130,00
0
-
$130,00
0
-$130,000
-$130,000
-$130,000
Changes in Working
Capital
-$65,000 -$65,000 -$65,000
$0
$0
Net Cash Flow Before Taxes
$155,0
00
$242,5
00
$379,375
$280,593.
75
$16,123.4
4
Taxes (25%)
-$38,750 -$60,625
-
$94,843.7
5
-
$70,148.44
-$4,030.86
Net Cash Flow After Taxes
$116,2
50
$181,8
75
$284,531.
25
$210,445.
31
$12,092.5
8
If the company determines it has to invest an additional $40,000 in inventory
initially, the initial working capital investment would be higher. Let's adjust the table:
Description
Year 0
Equipment cost
-$600,000
Shipping and installation charges
-$50,000
Initial working capital investment
-$120,000
Total Initial Investment
-$770,000
Changes in Working Capital for Each Year:
If the change in net working capital is equal to 50 percent of the change in revenues for each year, we need to adjust the working capital changes in the annual cash flow table. Let's incorporate these changes:
Description
Year 1
Year 2
Year 3
Year
4
Year 5
Changes in Working Capital (adjusted)
-
$300,00
0
-
$350,00
0
-
$425,00
0
$0
$0
Salvage Value of Equipment:
If the company believes the equipment will have a salvage value of $100,000 in five years, the depreciation for the last year will change. Let's adjust the depreciation in the annual cash flow table:
Description
Year 5
Depreciation (adjusted)
-$30,000
Challenging Element:
One challenging element in this problem is handling the changes in working capital. Determining the precise relationship between
the change in revenues and the change in working capital requires careful consideration, as it can significantly impact the cash flow calculations.
Question:
In expansion project analysis and capital budgeting, how do external factors such as changes in economic conditions, interest rates, or market trends affect the reliability of the cash flow projections?
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Related Questions
Explain all point of question with proper step by step Answer.
arrow_forward
A cash flow sequence has a receipt of $20,000 today, followed by a disbursement of $17,000 at the end of this year and again next year, and then a receipt of
$13,100 three years from now. The MARR is 6 percent.
a. What is the ERR for this set of cash flows?
b. What is the approximate ERR for this set of cash flows?
c. Would a project with these cash flows be a good investment?
a. The ERR is%.
(Round to two decimal places as needed.)
arrow_forward
A project has the following cash flows.
Year
0
1
2
3
4
Amount
-200
950
-850
75
12
You are a financial analyst, and note the sequence of cash flows.
What is the internal rate of return for this project?
Round your answer to two decimal places.
arrow_forward
An investment project requires an
initial cash outlay of $800 and then
generates the following cash flows.
End of year 1: $200 End of year 2: $
300 End of year 3: $500 What is the
IRR of this project?
arrow_forward
A project has estimated annual net cash flows of $63,700. It is estimated to cost $687,960. Determine the cash payback period. Round your answer to one decimal place.
arrow_forward
A project has estimated annual net cash flows of $80,000. It is estimated to cost $600,000.
Determine the cash payback period. Round your answer to one decimal place.
arrow_forward
Consider the cash flows for the following investment projects:
(a) For Project A. find the value of X that makes the equivalent annual receiptsequal the equivalent annual disbursement at i = 13%.(b) Would you accept Project Bat i = 15% based on the AE criterion?
arrow_forward
Keane & Co plc is considering two possible investments. The company requires an
Accounting Rate of Return of 12% and payback within 2 years. It has a cost of
capital of 12%.
Forecast sales and production units
Year 1
Year 2
Year 3
Year 4
Contribution per unit
Fixed cost per year
Initial investment
Residual (scrap) value
Accounting Rate of Return
Internal Rate Return
Discount factors at 12% are:
Year 1
Year 2
Year 3
Year 4
Year 5
0.893
0.797
0.712
0.636
0.567
Project J
60,000
110,000
80,000
50,000
£40
£800,000
£7,600,000
£300,000
9.5%
8%
Project K
30,000
24,000
20,000
12,000
£120
£700,000
£5,500,000
£150,000
19%
18%
arrow_forward
Which of the following statements is true? The internal rate of return is the rate of return of an investment project over its useful life. When the net cash inflow is the same
every year for a project after the initial investment, the internal rate of return of a project can be determined by dividing the initial investment required in the project by the
annual net cash inflow. This computation yields a factor that can be looked up in a table of present values of annuities to find the internal rate of return. Multiple Choice Only
statement I is true. Only statement II is true. Both statements are true.
arrow_forward
Based on the cash flows shown in the chart below, compute the NPV for Project Huron. Suppose that the appropriate cost of capital is 12 percent. Advise the organization about whether it should accept or reject the project. Project Huron Time 0 1 2 3 4 Cash Flow $12,000 $2,360 $4,390 $1,520 $3,300 Based on the cash flows shown in the chart below, compute the IRR and MIRR for Project Erie. Suppose that the appropriate cost of capital is 12 percent. Advise the organization about whether it should accept or reject the project. Project Erie Time 0 1 2 3 4 5 Cash Flow $12,000 $2,360 $4,390 $1,520 $980 $1,250
arrow_forward
Prepare a cashflow forecast,
Use investment appraisal techniques to calculate Net Present Value (NPV), Return on Capital and Payback Period.
Thank you!
arrow_forward
Consider the following project-balance profiles for proposed investment projects, where the project-balance figures are rounded to the nearest dollar:
(a) Compute the net present worth of each investment.(b) Determine the project balance at the end of period 2 for Project C ifA2 = $500.(c) Determine the cash flows for each project.(d) Identify the net future worth of each project.
arrow_forward
Please provide Answer with calculation
arrow_forward
a. What are the project’s annual net cash inflows?
b. What is the present value of the project’s annual net cash inflows? (Round your final answer to the nearest whole dollar amount.)
c. What is the project’s net present value? (Round final answer to the nearest whole dollar amount.)
d. What is the profitability index for this project? (Round your answer to 2 decimal places.)
e. What is the project’s internal rate of return? (Round your answer to nearest whole percent.)
arrow_forward
A project has an initial cost of $7,900 and cash inflows of $2,100, $3,140, $3,800, and $4,500 per year over the next four years, respectively. What is the payback period? I need the steps on a financial calculator the ba II
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For project A, the cash flow effect from the change in net working capital is expected to be $490.00 at time 2 and the level of net working capital is expected to
be $750.00 at time 1. What is the level of current assets for project A expected to be at time 2 if the level of current liabilities for project A is expected to be
$2,600.00 at time 2?
$2,860.00 (plus or minus $10)
$3,840.00 (plus or minus $10)
$1,360.00 (plus or minus $10)
$2,340.00 (plus or minus $10)
None of the above is within $10 of the correct answer
arrow_forward
The expected cash flows of a project are as follows. Year Cash Flow -100000, 20,000 ,30,000 40,000 ,50,000 30,000 The cost of capital is 12 per cent. Calculate the following and evaluate the project under each methods a. net present value b. Profitability Index c. Internal rate of Return d. Modified internal rate of Return and Payback period
arrow_forward
Consider an investment project with the cash flows given in the table below. Compute the IRR for this investment. Is the project acceptable at MARR = 10%?
The IRR for this project is %. (Round to one decimal place.)
n
0
1
2
3
Cash Flow
-$35,000
15,000
14,520
13,990
arrow_forward
Based on the cash flows given below, calculate the PI of a project that has a required rate of return of 12 percent. Also, indicate whether the project should be accepted. (Round answer to 2 decimal places, e.g. 25.25.)
Year 0:
-$94,000
Year 1:
$19,000
Year 2:
$36,000
Year 3:
-$16,000
Year 4:
$103,000
PI
Type your answer here
Accept project
Choose your answer here
arrow_forward
A project has the following cash inflows $40,000; $60,500; $70,000; and $48,800 for years 1 through 4, respectively. The initial cash outflow is $184,000. Which of the following four statements is correct concerning the project internal rate of return (IRR)?
a.
The IRR is between 10 and 14%
b.
The IRR > 18%
c.
The IRR < 10%
d.
The IRR is greater than 14% but less than 18%
arrow_forward
A project has the following cash inflows $40,000; $60,500; $70,000; and $48,800 for years 1 through 4, respectively. The initial cash outflow is $184,000. Which of the following four statements is correct concerning the project internal rate of return (IRR)?
a.
The IRR is between 10 and 14%
b.
The IRR > 18%
c.
The IRR < 10%
d.
The IRR is greater than 14% but less than 18%
In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following except __________.
a.
costs that have previously been incurred that are unrecoverable
b.
changes in costs due to a general appreciation in those costs
c.
the amount (net of taxes) that we could realize from selling a currently unused building of ours that we intend to use for our project
d.
changes in working capital resulting from the project, net of spontaneous changes in current liabilities
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A project has estimated annual net cash flows of $61,100. It is estimated to cost $311,610.
Determine the cash payback period. Round your answer to one decimal place.
years
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There is a project with the following cash flows :
Year
Cash Flow
0
−$ 29,300
1
8,600
2
8,500
3
7,900
4
6,700
What is the payback period?
arrow_forward
Consider the following sets of investment projects:
Compute the equivalent annual worth of each project at i = 13%, and determine the acceptability of each project.
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A project has the following cash flows:
Year 0 £10,500 initial investment
Year 1 4,486 cash inflow
Year 2 3,915 cash inflow
Year 3 3,206 cash inflow
Year 4 2,677 cash inflow
What is the internal rate of return of this project?
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