FIN 534 Week 8 Homework Set 4
topclassjobFIN 534 Week 8 Homework Set 4
UsethefollowinginformationforQuestions1through5:
Assumeyouarepresentedwiththefollowingmutuallyexclusiveinvestmentswhoseexpectednetcashflowsareasfollows:
EXPECTEDNETCASHFLOWS:
Year Project A Project B
0 −$400 −$650
1 −528 210
2 −219 210
3 −150 210
4 1,100 210
5 820 210
6 990 210
7 −325 210
1. ConstructNPVprofilesforProjectsAandB.
2. Whatiseachproject’sIRR?
3. Ifeachproject’scostofcapitalwere10%, whichproject,ifeither,shouldbeselected?Ifthecostofcapitalwere17%, whatwouldbetheproperchoice?
4. Whatiseachproject’sMIRRatthecostofcapitalof10%?At17%?(Hint:ConsiderPeriod7astheendofProjectB’slife.)
5. Whatisthecrossoverrate,andwhatisitssignificance?
UsethefollowinginformationforQuestions6through8:
ThestaffofPorterManufacturinghasestimatedthefollowingnetafter-taxcashflowsandprobabilitiesforanewmanufacturingprocess:
Line0givesthecostoftheprocess,Lines1through5giveoperatingcashflows,andLine5*containstheestimatedsalvagevalues.Porter’scostofcapitalforanaverage-riskprojectis10%.
NetAfter-TaxCashFlows
Year | P=0.2 | P=0.6 | P=0.2 |
0 | −$100,000 | −$100,000 | −$100,000 |
1 | 20,000 | 30,000 | 40,000 |
2 | 20,000 | 30,000 | 40,000 |
3 | 20,000 | 30,000 | 40,000 |
4 | 20,000 | 30,000 | 40,000 |
5 | 20,000 | 30,000 | 40,000 |
5* | 0 | 20,000 | 30,000 |
6. Assumethattheprojecthasaveragerisk.Findtheproject’sexpectedNPV.(Hint:Useexpectedvaluesforthenetcashflowineach year.)
7. Findthebest-caseandworst-caseNPVs.Whatistheprobabilityofoccurrenceof theworstcaseifthecashflowsareperfectlydependent(perfectlypositivelycorrelated)overtime?
8. Assumethatallthecashflowsareperfectlypositivelycorrelated.Thatis,assumethereareonlythreepossiblecashflowstreamsovertime—theworstcase,themostlikely(orbase)case,andthebestcase—withrespectiveprobabilitiesof0.2,0.6,and0.2.Thesecasesarerepresentedbyeachofthecolumnsinthetable.FindtheexpectedNPV,itsstandarddeviation,anditscoefficientofvariationforeachprobability.
UsethefollowinginformationforQuestion9:
Atyear-end2013,WallaceLandscaping’stotalassetswere$2.17millionanditsaccountspayablewere
$560,000.Sales,whichin2013were$3.5million,areexpectedtoincreaseby35%in2014.Totalassetsandaccountspayableareproportionaltosales,andthatrelationshipwillbemaintained.Wallacetypicallyusesnocurrentliabilitiesotherthanaccountspayable.Commonstockamountedto$625,000in2013,andretainedearningswere$395,000.Wallacehasarrangedtosell$195,000ofnewcommonstockin2014tomeetsomeofitsfinancingneeds.Theremainderofitsfinancingneedswillbemetbyissuing newlong-term debtattheendof2014.(Becausethedebtisaddedattheendofthe year,therewillbenoadditionalinterestexpense duetothenewdebt.)Itsnetprofitmarginonsalesis5%,and45%of earningswillbepaidoutasdividends.
9. WhatwereWallace’stotallong-termdebtandtotalliabilitiesin2013?
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