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5. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?
a. The company has spent and expensed $1 million on R&D associated with the new project
b. The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year
c. The new project is expected to reduce sales of one of the company's existing products by 5%
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- Your division is considering two investment projects, each of which requires an up-front expenditure of 25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars): a. What is the regular payback period for each of the projects? b. What is the discounted payback period for each of the projects? c. If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake? d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake? f. What is the crossover rate? g. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project?Company XYZ is considering an investment project that is expected to generate the following cash flows: Year 1: $500,000 Year 2: $700,000 Year 3: $800,000 Year 4: $900,000 Year 5: $1,200,000 The cost of capital for the company is 10%. Calculate the Firm's Present Value (FPV) of the cash flows. To calculate the Firm's Present Value (FPV) of the cash flows, you need to discount each cash flow to its present value using the cost of capital, and then sum up the present values of all cash flows.A company is considering investing in a new project that requires an initial investment of $1,000,000. The projected cash flows from the project are as follows: Year 1: $300,000 Year 2: $400,000 Year 3: $500,000 Year 4: $600,000 The company's required rate of return for similar projects is 12%. What is the Net Present Value (NPV) of the project? What is the Internal Rate of Return (IRR) of the project? YOU MUST SHOW CALCULATIONS TO BACK UP YOUR SELECTION. -$100,000// 12% $250,000 // 10% $250,000 // 14% $350,000 // 14% $50,000 // %14
- (a) ABC Ltd. is considering investing in a 2-year project which is expected to generate the following year-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the project is 10%. The initial cost of the project is $200 million. (i) Compute the Profit (Revenue – Cost) and NPV of the project. (ii) Based on the answer of part (a), should the project be accepted? Explain. (b) John has just purchased an apartment at a price of $5,000,000. He made a down-payment of $2,000,000 and financed the remaining with a 30-year mortgage at 12% per annum, compounded monthly. (a) Determine the size of the fixed month-end payments. (b) Calculate the interest payment and the amount of principal paid in the 121st loan repayment.The following are two projects a firm is considering: Project B Cash Flow Year 0 1 2 3 4 $2,939.01 Assuming that the relevant cost of capital for both projects is 11%, you should be able to determine the net present value (NPV) and the internal rate of return (IRR) for both project. Assume now that the firm has capital rationing, but knows that its true reinvestment rate is 20%, while its cost of capital is 11 percent. Given this information, determine the modified net present value (MNPV) for Project B. O $2.479.00 O $2.965.10 O$3.479.89 Project A Cash Flow O $4,084.05 ($10,000.00) ($11,000.00) $3,000.00 $5,000.00 $4,000.00 $4,000 00 $5,000.00 $4,000.00 $2,000.00 $2,000.00Question 2 (Investment Decision Rules and Project Cash Flows) Consider a hypothetical economy that has NO tax. ABC Ltd. is considering investing in a 2-year project which is expected to generate the following year-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the project is 10%. The initial cost of the project is $200 million. (a) Compute the profit and NPV of the project. (b) Based on the answer of part (a), should the project be accepted? Explain. (c) ABC’s cut-off period is 2 years. Compute the PI and Payback of the project. Based on these two methods, should ABC accept the project? (d) Write down the numerical formula for computing the IRR of this project. What is the minimum IRR value that would make this project acceptable? Explain. (e) Given the recommendations based on the four decision rules above, which project should ABC Ltd. accept? (f) Now suppose that of the $200m initial expenditure, $50m was used for the…
- 2. What is your best estimate of the weighted average cost of capital with and without the $100 million in borrowing ? You could invest those $100 million in a new project with a business risk (ie, asset risk) very similar to the current business risk of the company. This project has an expected before-tax revenues of $50 million, and costs of $30 million a year in perpetuity. Assume that the annual new capital expenditures are offset by the depreciation (5 million) and that annual NWC investment is negligible.5. Before evaluating the economic merits of a proposed investment, the XYZ Corporation insists that its engineers develop a cash-flow diagram of the proposal. An investment of ETB 10,000 can be made that will produce uniform annual revenue of ETB 5,310 for five years and then have a market (recovery) value of ETB2,000 at the end of year 2 Construction financial management (EOY) five. Annual expenses will be ETB3,000 at the end of each year for operating and maintaining the project. Draw a cash-flow diagram for the five-year life of the project and calculate the present value of an investment?13) The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service: Projected sales $22 million Operating costs (not including depreciation) $10 million Depreciation $5 million Interest expense $5 million The company faces a 25% tax rate. What is the project's operating cash flow for the first year (t = 1)? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as $1,200,000. Round your answer to the nearest dollar. _______$
- Question 2 (Investment Decision Rules and Project Cash Flows) Consider a hypothetical economy that has NO tax. ABC Ltd. is considering investing in a 2-year project which is expected to generate the following year-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the project is 10%. The initial cost of the project is $200 million. (f) Now suppose that of the $200m initial expenditure, $50m was used for the purchase of a machine that has an estimated economic life of four years. The machine will be fully depreciated (i.e., zero book value at the end of the machine’s economic life) on a straight-line basis and expected to have a resale value of $35m at the end of the project. (i) Explain how this will affect the size of the terminal (end-of-project) cash flows. (ii) How will this affect the NPV and the acceptance/rejection of the project (as compared to part (a))? Show your calculations.GTO Inc. is considering an investment costing $214,170 that results in net cash flows of $30,000 annually for 11 years. (a) What is the internal rate of return of this investment? (b) The hurdle rate is 9.5%. Should the company invest in this project on the basis of internal rate of return?Question 2 (Investment Decision Rules and Project Cash Flows) Consider a hypothetical economy that has NO tax. ABC Ltd. is considering investing in a 2-year project which is expected to generate the following year-end cash flows: C1 = $110 million, C2 = $115 million. The yearly discount rate for the project is 10%. The initial cost of the project is $200 million. Write down the numerical formula for computing the IRR of this project. What is the minimum IRR value that would make this project acceptable? Explain.
