Using the NPV index approach to ranking projects, which projects should the firm accept? * A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of P1,000,000; the firm's cost o capital is 15 percent. Project Initial investment P200,000 400,000 250,000 200,000 150,000 400,000 IRR 19% 17 16 12 20 15 NPV P100,000 20,000 60,000 -5,000 50,000 150,000 4 5 O 1, 6, 5 and 3 O 1, 2, 3, and 5 O 2, 3, 4, and 6 O 1, 3, 4, and 6
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- Blue Spruce Inc. is comparing several alternative capital budgeting projects as shown below: Initial investment Present value of net cash flows O C.B.A OA.C.B. OC.A.B. OAB.C. A Save for Later $102000 112000 Using the profitability index, the projects rank as Projects B $142000 $182000 222000 132000 C & Attempts: 0 of 1 used Submit Answer PriScAn all-equity firm is considering the projects shown below. The T-bill rate is 4 percent and the market risk premium is 7 percent. Project Expected Return A Project A Project B Project C Project D 8.0% 19.0 13.0 17.0 Calculate the project-specific benchmarks for each project. (Round your answers to 1 decimal place.) O Project C O Project D Beta 0.5 1.2 1.4 % % % % If the firm uses its current WACC of 12 percent to evaluate these projects, which project(s), will be incorrectly accepted? O Project A O Project BComparing Investment Criteria [L01,2,3,5,7] Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 -$300,000 -$40,000 1 20,000 19,000 2 50,000 12,000 3 50,000 18,000 4 390,000 10,500 Whichever project you choose, if any, you require a 15 per cent return on your investment. a. If you apply the payback criterion, which will you choose? Why? b. If you apply the discounted payback criterion, which investment will you choose? Why? c. If you apply the NPV criterion, which investment will you choose? Why? d. If you apply the IRR criterion, which investment will you choose? Why? e. If you apply the profitability index criterion, which investment will you choose? Why? f. Based on your answers in (a) through (e), which project will you finally choose? Why? Please explain your calculations and conclusions
- Q3) Based on the information below which projects will we choose based on weighted average profitabiltity Index if we only have OMR500,000 to invest? Select one: Project NPV Investment PI A 130,000 200,000 B 241,250 225,000 C 294,250 275,000 D 262,000 250,000P12-20 RISK-ADJUSTED DISCOUNT RATES: BASIC Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm's cost of capital, r, is 10%, and the risk-free rate, RF, is 2%. The firm has estimated each project's cash flow and each project's beta, as shown in the following table. Excel Initial investment (CF) Year (t) 1 2 3 4 Beta E Where -$15,000 $6,000 6,000 6,000 6,000 RF B; RADR, 1.80 Project () F -$11,000 Cash inflows (CF,) $6,000 4,000 5,000 2,000 1.00 G a. Find the NPV of each project, using the firm's cost of capital. Which project is preferred in this situation? risk-free rate beta of project; T'm risk-adjusted discount rate for project ; expected return on market portfolio Substitute each project's beta into this equation to determine its RADR. -$19,000 b. The firm uses the following equation to determine the risk-adjusted discount rate, RADRj, for each project j: RADR, RF + B₂ × (rm RF) $ 4,000 6,000 8,000 12,000 0.60 2% 10% c. Use…Suppose a firm estimates its overall cost of capital for the coming year to be 10%. What might be reasonable costs of capital for average-risk, high-risk, and low-risk projects?
- Profitability index. Given the discount rate and the future cash flow of each project listed in the following table, use the PI to determine which projects the company should accept. What is the PI of project B?(Round to two decimal places.) Cash Flow Project A Project B Year 0 −$1,800,000 −$2,400,000 Year 1 $500,000 $1,200,000 Year 2 $600,000 $1,100,000 Year 3 $700,000 $1,000,000 Year 4 $800,000 $900,000 Year 5 $900,000 $800,000 Discount rate 5% 17%Calculate the firm's WACC (using 2018 numbers). (You will need to collect information on the long-term debt and common stock equity from the Balance Sheet. The firm has no preferred stock). Use the WACC to calculate NPV and evaluate IRR for proposed capital budgeting projects. Assume the projects are mutually exclusive and the firm has the money available to fund the project. 12/31/2018 12/31/2017 12/31/2016 12/31/2015 Current Assets Cash And Cash Equivalents 8,719,000 10,607,000 9,157,000 9,095,000 Short Term Investments 270,000 8,897,000 6,966,000 2,912,000 Net Receivables 7,140,000 7,021,000 6,693,000 6,436,000 Inventory 3,126,000 2,944,000 2,722,000 2,719,000 Other Current Assets 2,042,000 43,000 31,000 730,000 Total Current Assets 21,297,000 29,512,000 25,569,000 21,892,000 Long Term Investments 2,407,000 2,039,000 1,949,000 2,310,000 Property Plant and Equipment 17,587,000 17,237,000 16,590,000 16,316,000 Goodwill 14,806,000…H1. Optimal Capital Budgeting (Capital Expenditure valuations) Dandy Panda´s Japan affiliated company presents a capital structure which is also its target capital structure, which calls for 50% debt and 50’% common equity. Tokyo´s manufacturing has only one (1) potential project, an expansion program with a 10.2% IRR and a cost of USD 20 million. However, the project is completely divisible, that is Panda´s directors can decide to invest any amount up to USD 20 million. Tokyo expects to retain $3 million of earnings next year. It can raise debt at a pre-tax annual cost of 10%. The cost of the retained earnings in the Balance sheet would be 12% per year. Dandy Panda Japan can sell new stock at a constant cost of new equity of 15%. Japan has a marginal tax rate of 40% What is Dandy Panda´s Japan optimal Capital Budget to be calculated by the Company between zero and USD 20 million?
- Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 9 percent. Time: 0 1 2 3 4 5 Cash flow: -76 -76 0 111 86 61 rev: 11_25_2016_QC_CS-70617 Multiple Choice 1.49, accept 66.35, accept 9.00, reject 37.21, acceptSuppose a company has the following three projects and limits its capital budget to $50000. Projects Present Value of Cash Inflows Initial Investment A $40000 $25000 В 37500 25000 70000 50000 1. Calculate the projects' net present values (NPVS). 2. Calculate the projects' profitability indexes (PIs). 3. Which project(s) should the company choose? Why?Consider the following projects: Cash Flows ($) Project D E CO00 C101 -11,700 23,400 -21,700 37,975 Assume that the projects are mutually exclusive and that the opportunity cost of capital is 12%. a. Calculate the profitability index for each project. b-1. Calculate the profitability-index using the incremental cash flows. b-2. Which project should you choose?