FINC Assingment 6

Student{, :Dile: 12/16/14 'Time: l0:12PM

Instructor: Timmothy Posey Assignment: Week 6 Homework Course: FINC400 D002 Fall 14 Book: Keown/Tv{artin/Pefly, Foundations ofFinance, 8e

l. (IRR calculation) Determine the 1ftR on the following projects:

a. An initial outlay of 58,000 resulting in a free cash flow of $1,993 at the end of each year for the next I 1 years b. An initial outlay of $8,000 resulting in a free cash flow of $2,138 at the end of each year for the next 20 years c. An initial outlay of $8,000 resulting in a free cash flow of $1,141 at the end of each year for the next 13 years d. An initial outlay of $8,000 resulting in a free cash flow of $2,929 at the end of each year for the next 6 years

a. What is the lrtR of a project with an initial outlay of $8,000 resulting in a free cash flow of $1,993 at the end ofeach year for the next 1 I years?

[Z lnound to two decimal places.)

b. What is the /RR of a project with an initial outlay of $8,000 resulting in a free cash flow of $2,138 at the end ofeach year for the next 20 years?

[X ino"nd to two decimal places.)

c. What is the 1fiR of a project with an initial outlay of $8,000 resulting in a free cash flow of $ I , 14 1 at the end of each year for the next I 3 years?

[X 6ound to two decimal places.)

d. What is the 1RR of a project with an initial outlay of $8,000 resulting in a free cash flow of 52,929 at the end of each year for the next 6 years?

[_]X 1no*d to two decimal places.)

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Studentfl tnstructor: Timmothy Posey Assignment: Week 6 Homewod( Dilez 12/16/14 Course: FINC400 D002 Fall 14 Time: 10:12 PM Book: Keown/lvfartinPetty, Foundations

ofFinance, 8e

2. (NPV, PI, and IKR calcalations) Fijisawa Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $1,900,000, and the project would generate incremental free cash flows of $500,000 per year for 7 years. The appropriate required rate ofreturn is 6 percent.

a. Calculate the NPY. b. Calculate the P/. c. Calculate the IRR. d. Should this project be accepted?

a. What is the project's NPW

$f 1no""d to the nearest dollar.)

b. What is the projecfs PI?

I lnouna to three decimal places.)

c. What is the project's IR.R?

[X 6ou"a to two decimal places.)

d. Should this project be accepted? (Select the best choice below.)

CA. Yes. ThE project should be accepted because the project's NPV is positive, Pl is greater than one, and /ltR is gteater than the required rate of return.

Q B. No. The project should be rejected because the project's NPV is negative, P1 is less than one, and./RJ? is less than the required rate of rehrrn.

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Student:e Instructor: Timmothy Posey Assignment: Week 6 Homework Datez 12/16/14 Course: FINC400 D002 Fall 14 Time: 10:12 PM Book: Keown/Martin/Petty, Foundations

ofFinance, Se

3. (Payback period, NPV, PI, and IRR calculations) You are considering a project with an initial cash outlay of $90,000 and expected free cash flows of $30,000 at the end of each year for 7 years. The required rate ofreturn for this project is 9 percent.

a. What is the project's payback period? b. What is the project's NPW c. What is the project's P1? d. What is the project's IRR?

a. The project's payback period is ff years. (Round to two decimal places.)

b. The project's NPV is $[. lnound to the nearest cent.)

c. The the project's Pl is f]. (Round to three decimal places.)

d. The project's litR is )'lr. (Round to two decimal places.)

4. (NPV calculation) Calculate the NPV given the following cash flows if the appropriate required rate of return is I l%.

YEAR CASHFLOWS E * $70,000

25,000

25,000

20,000

20,000

15,000

15,000

0

I ) J

4

5

6

Should the project be accepted?

What is the project's NPm

S[ {noond to the nearest cent.)

Should the project be accepted? (Select the best choice below.)

i *

i A. No, the project should be rejected because its NPV is - $ I 7,532.91 .

r.-.i8. Yes, the project should be accepted because its NPV is $17,532.91.

i.:ic. Yes, the project should be accepted because its NPV is $25,187.91.

r -

, D. No, the project should be rejected because its NPV is - $25,187.91.

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i';::i'h,.- fnstructor: Timmothy Posey Assignment: Week 6 HomeworkCourse: FINC400 D002 Fall 14 Time: 10:12 PM

3#i:"5.iln/N1artin/Petty, Foundations

5. (IRR of uneven cash-flow stream) Microwave Oven Programming,Inc. is considering the construction of a new plant. The plant will have an initial cash outlay of $8 million, and will produce cash flows of $3 million at the end of year l, $4 million at the end of year 2, and 52 million at the end of years 3 through 5. What is the internal rate of return on this new plant?

The internal rate of return on this new plant is i--jX. (Round to two decirnal places.)

6. (Mutually exclusive projects) Nanotech, Inc. currently has a production electronics facility and it is cost prohibitiye to expand this production facilify. Nanotech is deciding between the following fotu contracts:

CONTRACT'S NP'l USE OF PRODUCTION FACILITY A B

C

D

$120 million $110 million

$60 million

$50 million

t00% 90%

60%

40%

Which project or projects should they accept?

(Select the best choice belorv.)

r-.A. BandD

,. .,8 B and C ,,-."c. B

'":D A ,-..[. CandD

7. (Calculatingfree cashflows) Racin' Scooters is introducing a new product and has an expected cha EBIT of $425,000. Racin' Scooters has a 34 percent marginal tax rate. The project will also produr S 130,000 of depreciation per year. In addition, the project will also cause the following changes in

WITHOUT THE PROJECT WITH THE PROJECT

Accounts receivable

Inventory

Accounts payable

s47,000

63,000

74,000

$60,000

85,000

99,000

What is the project's free cash flow in year l?

The project's free cash flow in year I is $[-f . (Round to the nearest dollar.)

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.-.r..,r..I1 rja/.e: l2ll6/14

Instructor: Timmothy Posey Assignment: Week 6 Homework Course: FINC400 D002 Fall 14

Time: 10:12 PM 3#l"ffiH/Iv1artin/Petty,

Foundations

g. (New project analysis) Garcia's Truckin' Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $70,000 per year. To operate the machine properly, workers would have to go through a brief training session that would cost $4,000 after taxes. It would cost $4,000 to install the machine properly. Also, because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $10,000. This machine has an expected life of 10 years, after which it will have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $100,000 at 12 percent interest from its local bank, resulting in additional interest payments of $ 12,000 per year. Assume simplified straight-line depreciation and that the machine is being depreciated down to zero, a 33 percent marginal tax rate, and a required rate ofreturn of I I percent.

a. What is the initial outlay associated with this project? b. What are the annual after-tax cash flows associated with this project for years I through 9? c. What is the terminal cash flow in year l0 (what is the annual after-tax cash flow in year l0 plus any additional cash flows associated with the termination of the project)? d. Should the machine be purchased?

a. What is the initial outlay associated with this project?

Sl--j eound to the nearest dollar.)

b. What are the annual after-tax cash flows associated with this project for years I through 9 (note that the cash flows for years I through 9 are equal)?

$i--i 6ound to the nearest dollar.)

c. What is the terminal cash flow in year l0 (what is the annual after-tax cash flow in year l0 plus any additional cash flows associated with the termination of the project)?

S'i--l 6nund to the nearest dollar.)

d. What is the project's NPV given a required rate of return of I 1 percent?

Sl_ I in"uncl to the nearest <lollar.)

Should the machine be purchased? (Select the best choice beow.)

,-..A. Yes. Theproject's NPVis positive.

r -.8. No. The project's NPV is negative.

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