76°FMostly cloudy2Current AttemptPharoah Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independentprojects are given in the following table. The firm uses a discount rate of 15.04 percent for such projects.YearProduct Line ExpansionProduction Capacity Expansion0-$2,166,800-$7,516,1001647,5002,315,4002807,4002,315,400807,4002,315,4004807,4003,165,0005807,4003,165,000a. What are the NPVS of the two projects? (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Roundother intermediate calculations and final answer to 0 decimal places, e.g. 1,525.)*NPV of product line expansion is$NPV of production capacity expansion isF2DII3#F3SearchPrtScnHomeEndPgUpF9$%&4567890WERTYUSDXAltFFGHJKCVBNMP

NPV, or net present value, is how much an investment is worth throughout its lifetime, discounted to…

Answered: 76°F Mostly cloudy 2 Current Attempt…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter11: The Cost Of Capital

Section: Chapter Questions

Problem 18PROB

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REPLACEMENT CHAIN The Lesseig Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next 8 years. Machine A costs 8.9 million but will provide after-tax inflows of 4.5 million per year for 4 years. If Machine A were replaced, its cost would be 9.8 million due to inflation and its cash inflows would increase to 4.7 million due to production efficiencies. Machine B costs 13.9 million and will provide after-tax inflows of 4.3 million per year for 8 years. If the WACC is 9%, which machine should be acquired? Explain.
REPLACEMENT CHAIN The Fernandez Company has an opportunity to invest in one of two mutually exclusive machines that will produce a product the company will need for the next eight years. Machine A costs 10 million but will provide after-tax inflows of 4 million per year for 4 years. If Machine A were replaced, its cost would be 12 million due to inflation and its cash inflows would increase to 4.2 million due to production efficiencies. Machine B costs 15 million and will provide after-tax inflows of 3.5 million per year for 8 years. If the WACC is 10%, which machine should be acquired? Explain.
39. Vita Pharmaceutical Co. is considering four proposals for the expansion of its dietary supplements production facility. The investment requirements and the cash flows for an 8-year period are presented below. P1 P2 P3 P4 Initial Investment P13M P14.5M P15M 15.8M Annual Receipts 1.5M 1.6M 1.7M 2.2M Annual Disbursements 0.7M 0.5M 0.65M 0.7M Salvage Value 1.3M 1.5M 2M 2.5M Determine the best alternative if the company applies a 14% MARR of its investments. (Ans. Consider P4; i2-1=13.27% ; i3-1=5.91% ; i4-1=21.76%)
A B Initial investment outlay ($) 200,000 275,000 Freight Charges ($) 20,000 30,000 Set Up charges ($) 5,000 7,000 Economic Life (Years) 10 10 Liquidation value at end of economic life ($) 12,000 17,000 Other fixed costs ($) 4,000 20,000 Production and sales volume (units) 9,000 12,000 Sales Price ($) 15 15 Variable Cost ($) 2.45 2.00 Rate of interest (%) 6 6 Ascertain the preferred project using:a. The profit comparison method. b. The average rate of return method. c. The static payback method d. Re-evaluate the projects using the Net Present Value. Are the results of the Project selection process the same? If different, what reasons can you offer?
man.6 Crenshaw Enterprises has gathered projected cash flows for two projects. Year Project I Project J 0 −$ 266,000 −$ 266,000 1 113,400 94,600 2 106,200 100,600 3 90,200 102,600 4 79,200 109,600 At what interest rate would the company be indifferent between the two projects? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. Which project is better if the required return is above this interest rate?
[EXCEL] Net present value: Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 9 percent discount rate for production system projects, in which system should the firm invest? Please use excel. Year System 1 System 2 0 −$15,000 −$45,000 1 15,000 32,000 2 15,000 32,000 3 15,000 32,000
Cullumber Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table. The firm uses a discount rate of 14.98 percent for such projects. Year Product Line Expansion Production Capacity Expansion 0 -$2,426,500 -$6,756,300 1 501,800 2,381,500 2 853,000 2,381,500 3 853,000 2,381,500 4 853,000 3,975,200 5 853,000 3,975,200 a. What are the NPVs of the two projects? (Enter negative amounts using negative sign, e.g. -45.25. Do not round discount factors. Round other intermediate calculations and final answer to 0 decimal places, e.g. 1,525.) NPV of product line expansion is $ NPV of production capacity expansion is $ b. Should both projects be accepted? or either? or neither? Explain your reasoning.
512 Skiba Company is thinking about two different modifications to its current manufacturing process. The after-tax cash flows associated with the two investments follow: Year Project I Project II 0 $(100,000) $(100,000) 1 — 63,857 2 134,560 63,857 Skiba's cost of capital is 10%. Required: 1. Compute the NPV and the IRR for each investment. Round present value calculations and your final NPV answers to the nearest dollar. Round IRR answers to the nearest whole percent. NPV IRR Project I $fill in the blank 1 fill in the blank 2 % Project II $fill in the blank 3 fill in the blank 4 % 2. Conceptual Connection: Explain why the project with the larger NPV is the correct choice for Skiba. NPV is an absolute profitability measure and reveals how much the value of the firm will change for each project. IRR gives a measure of relative profitability . Thus, since NPV reveals the total wealth change attributable to each project, it is preferred…

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