1. In the more complex situation discussed in the Gapenskiarticle about Monte Carlo simulation, in addition to the throughputvariable, the following second uncertain variable wasanalyzed:
a. project horizon
b. discount rate
c. accounts payable
d. salvage value
2. Suppose a project has cash flows of (-20, 5, 16, 5, 9, 2) inyears (0, 3, 4, 5, 6, 7) respectively. What is IRR?
a. 53.86%
b. 27.98%
c. 17.32%
d. 14.44%
3. Suppose a project has cash flows of (-20, 5, 16, 5, 9, 2) inyears (0, 3, 4, 5, 6, 7) respectively. What is Payback?
a. 6
b. 3
c. 4
d. 2
1. In the more complex situation discussed in the Gapenskiarticle about Monte Carlo simulation, in addition to the throughputvariable, the following second uncertain variable wasanalyzed:
a. project horizon
b. discount rate
c. accounts payable
d. salvage value
2. Suppose a project has cash flows of (-20, 5, 16, 5, 9, 2) inyears (0, 3, 4, 5, 6, 7) respectively. What is IRR?
a. 53.86%
b. 27.98%
c. 17.32%
d. 14.44%
3. Suppose a project has cash flows of (-20, 5, 16, 5, 9, 2) inyears (0, 3, 4, 5, 6, 7) respectively. What is Payback?
a. 6
b. 3
c. 4
d. 2
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Related questions
1.
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. |
Time: | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
Cash flow | â$4,800 | $1,210 | $2,410 | $1,610 | $1,530 | $1,410 | $1,210 |
Use the payback decision rule to evaluate this project. (Round your answer to 2 decimal places.) |
Payback | years |
2.
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. |
Time: | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
Cash flow | â$7,700 | $1,110 | $2,310 | $1,510 | $1,510 | $1,310 | $1,110 |
Use the IRR decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.) |
IRR | % |
3.
KADS, Inc., has spent $360,000 on research to develop a new computer game. The firm is planning to spend $160,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $46,000. The machine has an expected life of three years, a $71,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new game is expected to be $560,000 per year, with costs of $210,000 per year. The firm has a tax rate of 40 percent, an opportunity cost of capital of 13 percent, and it expects net working capital to increase by $80,000 at the beginning of the project. |
What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.) |
Year | 0 | 1 | 2 | 3 | ||||
FCF | $ | $ | $ | $ | ||||
4.
Your firm needs a computerized machine tool lathe which costs $49,000 and requires $11,900 in maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 34 percent and a discount rate of 13 percent. |
If the lathe can be sold for $4,900 at the end of year 3, what is the after-tax salvage value? (Round your answer to 2 decimal places.) |
Salvage value after tax | $ |
5.
You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $360 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $205 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $153,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $31,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 39 percent and the required return on the project is 12 percent. (Use SL depreciation table) |
What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to 2 decimal places.) |
Year | 0 | 1 | 2 | 3 | ||||
Total cash flow | $ | $ | $ | $ | ||||
Capital Budgeting Group Presentation Project
Instructions: This project requires you to apply the concepts and methods learned in the course. This is a group project.
Assignment: You are interested in proposing a new venture (Project I) to the management of your company. Pertinent financial information is given below.
Balance Sheet Data
Cash | 3,000,000 | Accounts Payable and Accruals | 14,000,000 |
Accounts Receivable | 24,000,000 | Notes Payable | 41,000,000 |
Inventories | 45,000,000 | Long-Term Debt | 50,000,000 |
Preferred Stock | 20,000,000 | ||
Net Fixed Assets | 128,000,000 | Common Equity | 75,000,000 |
Total Assets | 200,000,000 | Total Liabilities & Ownersâ Equity | 200,000,000 |
Last yearâs sales were $210,000,000.
The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 9 percent semi-annual coupon, and are currently selling for $870.73.
You also have 100,000 shares of perpetual preferred stock outstanding, which pays a dividend of $7.80 per share. The current market price is $94.00.
The company has 10 million shares of common stock outstanding with a current price of $15.00 per share. The stock exhibits a constant growth rate of 8 percent. The last dividend (D0) was $.90.
Your firm does not use notes payable for long-term financing.
The firmâs target capital structure is 25% debt, 5% preferred stock, and 70% common equity. The firm does not plan to issue new common stock.
Your firmâs federal + state marginal tax rate is 38%.
The firm has the following investment opportunities currently available in addition to the venture that you are proposing:
Project | Cost | IRR |
A | 17,000,000 | 21% |
B | 21,000,000 | 19% |
C | 16,000,000 | 15% |
D | 28,000,000 | 11% |
E | 25,000,000 | 8% |
All projects, including Project I, are assumed to be of average risk. Your venture would consist of a new product introduction (You should label your venture as Project I, for âintroductionâ). You estimate that your product will have a six-year life span, and the equipment used to manufacture the project falls into the MACRS 5-year class. The resulting MACRS depreciation percentages for years 1 through 6, respectively, are 20%, 32%, 19%, 12%, 11%, and 6%. Your venture would require a capital investment of $17,000,000 in equipment, plus $1,000,000 in installation costs. The venture would also result in an increase in accounts receivable and inventories of $1,000,000 (value at the end of year 6). At the end of the six-year life span of the venture, you estimate that the equipment could be sold at a $5,000,000 salvage value. Your venture would incur fixed costs of $1,000,000 per year, while the variable costs of the venture would equal 30 percent of revenues. You are projecting that revenues generated by the project would equal $6,000,000 in year 1, $14,000,000 in year 2, $15,000,000 in year 3, $16,000,000 in year 4, $11,000,000 in year 5, and $8,000,000 in year 6.
The following list of steps provides a structure that you should use in analyzing your new venture. Note: Carry all final calculations to two decimal places.
1. Find the costs of the individual capital components (15 points):
a. long-term debt
b. preferred stock
c. retained earnings (use DCF approach)
2. Determine the weighted average cost of capital. (5 points)
3. Compute the Year 0 investment for Project I. (5 points)
4. Compute the annual operating cash flows for years 1-6 of the project. (20 points)
5. Compute the non-operating (terminal) cash flow at the end of year 6. (10 points)
6. Draw a timeline that summarizes all of the cash flows for your venture. (5 points)
7. Compute the IRR, payback, discounted payback, and NPV for Project I. (20 points)
8. Prepare a report for the firmâs CEO indicating which projects should be accepted and why. (45 points)
9. Conclude the project with your reflections on what you have learned from this course and how it has affected your view of your own job and career. (45 points)
10. A 15-20 minute presentation will report out on items 1-9. (65 pts.)
Please Note: Complete the capital budgeting group project according to the instructions contained in the syllabus, and upload all documentation and calculations into this assignment folder. There will be only one submission per group, and submitter will be chosen by the group. Please let the instructor know who will be submitting the group project to Moodle.