TIME VALUE ANALYSIS / CAPITAL BUDGETING
dirk_22
HW4.xlsx4.1
| CHAPTER 9: TIME VALUE ANALYSIS |
| Homework 4.1, Chapter 9 |
| Find the following values for a lump sum assuming annual compounding. |
| a. The future value of $500 invested at 4% for one year |
| b. The future value of $600 invested at 3% for five years |
| c. The present value of $700 invested at 5% for one year |
| d. The present value of $800 invested at 3% for five years |
4.2
| CHAPTER 9: TIME VALUE ANALYSIS |
| Homework 4.2, Chapter 9 |
| Find the following values assuming a regular, or ordinary, annuity. |
| a. The present value of $700 per year for 10 years at 5% |
| b. The future value of $700 per year for 10 years at 4% |
| c. The present value of $500 per year for 7 years at 4% |
| d. The future value of $500 per year for 7 years at 4% |
4.3
| CHAPTER 9: TIME VALUE ANALYSIS | |
| Homework 4.3, Chapter 9 | |
| Consider the following uneven cash flow stream: | |
| Year | Cash Flow |
| 0 | -$4,000 |
| 1 | 0 |
| 2 | 1,000 |
| 3 | 1,500 |
| 4 | 3,000 |
| 5 | 4,500 |
| a. What is the present (Year 0) value of the cash flow steam if the opportunity cost rate is 6%? | |
| b. What is the future (Year 5) value of the cash flow stream if the cash flows are invested in an account that pays 4% annually? | |
4.4
| CHAPTER 9: TIME VALUE ANALYSIS |
| Homework 4.4, Chapter 9 |
| a. Assume that you just $25 million in the Texas lottery, and hence the state will pay you 20 annual payments of $1.25 million at the end of each year. If the rate of return on securities of similar risk to the lottery earning (e.g., the rate on 20-year U.S. Treasury bonds) is 5%, what is the present value of your winnings? |
| b. Considering this, which option should you take? Explain your answer. |
| - Option 1: a lump sum payment of $25 million up front |
| - Option 2: 20 annual payments of $1.5 million |
4.5
| CHAPTER 14: CAPITAL BUDGETING |
| Homework 4.5, Chapter 14 |
| West Plains Clinic is evaluating a project that costs $72,500 and has expected net cash inflows of $18,000 per year for seven years. The first inflow occurs one year after the cost outflow, and the project has a cost of capital of 5 percent. |
| a. What is the project's payback? |
| b. What is the project's NPV? |
| c. What is the project's IRR? |
| d. What is the MIRR? |
| e. Is the project financially acceptable? Explain your answer. |
4.6
| CHAPTER 14: CAPITAL BUDGETING | ||
| Homework 4.6, Chapter 14 | ||
| Healthy Valley Medical Center is evaluating two investment projects, each of which requires an up-front expenditure of $1.25 million. The projects are expected to produce the following net cash inflows: | ||
| Year | Project A | Project B |
| 1 | 600,000 | 800,000 |
| 2 | 1,250,000 | 400,000 |
| 3 | 1,500,000 | 300,000 |
| a. What is each project's IRR? | ||
| b. What is each project's NPV if the cost of capital is 10%? |
4.7
| CHAPTER 14: CAPITAL BUDGETING | |||||
| Homework 4.7, Chapter 14 | |||||
| Assume that you are the COO at Cactus Valley Medical Center. The CEO has asked you to analyze two proposed capital investments—Project X and Project Y. Each project requires a net investment outlay of $35,000, and the cost of capital for each project is 7 percent. The expected net cash flows for each project are as follow: | |||||
| Year | Project X | Project Y | |||
| 1 | 8,000 | 18,000 | |||
| 2 | 8,000 | 12,500 | |||
| 3 | 8,000 | 8,000 | |||
| 4 | 8,000 | 5,000 | |||
| 5 | 8,000 | 4,000 | |||
| a. Calculate each project's payback period, net present value (NPV), and internal rate of return (IRR). | |||||
| b. Which project(s) is/are financially acceptable? Explain your answer. |
