Finance H.W (9 questions)

Profitability Index

A project has an initial cost of $41,875, expected net cash inflows of $10,000 per year for 9 years, and a cost of capital of 11%. What is the project's PI? Do not round your intermediate calculations. Round your answer to two decimal places.

Payback

A project has an initial cost of $49,425, expected net cash inflows of $13,000 per year for 7 years, and a cost of capital of 13%. What is the project's payback period? Round your answer to two decimal places.

 years

NPVs, IRRs, and MIRRs for Independent Projects

Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $15,000, and that for the pulley system is $21,000. The firm's cost of capital is 11%. After-tax cash flows, including depreciation, are as follows:

Year	Truck	Pulley
1	$5,100		$7,500
2	5,100		7,500
3	5,100		7,500
4	5,100		7,500
5	5,100		7,500

a. Calculate the IRR for each project. Round your answers to two decimal places.

Truck:  %  What is the correct accept/reject decision for this project?

Pulley:  %  What is the correct accept/reject decision for this project?

b. Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million.

Truck: $   What is the correct accept/reject decision for this project?

Pulley: $   What is the correct accept/reject decision for this project?

c. Calculate the MIRR for each project. Round your answers to two decimal places.

Truck:  %  What is the correct accept/reject decision for this project?

Pulley:  % What is the correct accept/reject decision for this project?

Capital Budgeting Methods

Project S has a cost of $11,000 and is expected to produce benefits (cash flows) of $3,400 per year for 5 years. Project L costs $23,000 and is expected to produce cash flows of $6,900 per year for 5 years.

a. Calculate the two projects' NPVs, assuming a cost of capital of 14%. Round your answers to the nearest cent.

Project S	$
Project L	$

b. Which project would be selected, assuming they are mutually exclusive?

c. Calculate the two projects' IRRs. Round your answers to two decimal places.

Project S	%
Project L	%

d. Which project would be selected, assuming they are mutually exclusive?

e. Calculate the two projects' MIRRs, assuming a cost of capital of 14%. Round your answers to two decimal places.

Project S	%
Project L	%

f. Which project would be selected, assuming they are mutually exclusive?

g. Calculate the two projects' PIs, assuming a cost of capital of 14%. Round your answers to two decimal places.

Project S
Project L

h. Which project would be selected, assuming they are mutually exclusive?

i. Which project should actually be selected?

Scale Differences

The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $56 million on a large-scale, integrated plant that will provide an expected cash flow stream of $9 million per year for 20 years. Plan B calls for the expenditure of $12 million to build a somewhat less efficient, more labor-intensive plant that has an expected cash flow stream of $3.8 million per year for 20 years. The firm's cost of capital is 11%.

a. Calculate each project's NPV. Round your answers to the nearest dollar.

Project A	$
Project B	$

b. Calculate each project's IRR. Round your answers to two decimal places.

Project A	%
Project B	%

c.

d. Set up a Project Δ by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant. 

Year	Project Δ Cash Flows
0	$
1-20	$

e. What is the NPV for this Project Δ? Round your answer to the nearest dollar. 

f. $  

g. What is the IRR for this Project Δ? Round your answer to two decimal places.  %

h. Graph the NPV profiles for Plan A, Plan B, and Project Δ.

Select the correct graph.

  

The correct graph is  .

Unequal Lives

Shao Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million and will produce net cash flows of $28 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $27 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the company's cost of capital is 9%.

a. By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $   million

b. What is the equivalent annual annuity for each plane? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.

Plane A	$   million
Plane B	$   million

Multiple Rates of Return

The Ulmer Uranium Company is deciding whether or not to open a strip mine whose net cost is $4.4 million. Net cash inflows are expected to be $27.7 million, all coming at the end of Year 1. The land must be returned to its natural state at a cost of $25 million, payable at the end of Year 2.

a. Plot the project's NPV profile.

Select the correct graph.

  

The correct graph is  .

b. Should the project be accepted if r = 6%?   Should the project be accepted if r = 14%?  

c. Can you think of some other capital budgeting situations in which negative cash flows during or at the end of the project's life might lead to multiple IRRs? The input in the box below will not be graded, but may be reviewed and considered by your instructor.

d. What is the project's MIRR at r = 6%? Round your answer to two decimal places.  %  What is the project's MIRR at r = 14%? Round your answer to two decimal places.  %  Calculate the two projects' NPVs. Round your answers to the nearest cent. Enter your answers in dollars. For ex: 1.2 million should be entered as 1,200,000. Enter negative answers with minus sign.

Project 1    $    Project 2    $   

Does the MIRR method lead to the same accept-reject decision as the NPV method?

Present Value of Costs

The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are: (1) a conveyor system with a high initial cost, but low annual operating costs, and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 11%, and the projects' expected net costs are listed in the following table:

	EXPECTED NET COST
Year	Conveyor	Forklift
0	-$500,000	-$200,000
1	-120,000	-160,000
2	-120,000	-160,000
3	-120,000	-160,000
4	-120,000	-160,000
5	-20,000	-160,000

a. What is the IRR of each alternative?  Method 1   Method 2 

b. What is the present value of the costs of each alternative? Round your answers to the nearest dollar, if necessary. Enter your answers as a whole numbers. For example, do not enter 1,000,000 as 1 million. Enter negative answers with minus sign.  Method 1 $    Method 2 $    Which method should be chosen?

Economic Life

The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250 per year. The truck has a 5-year expected life. The expected salvage values after tax adjustments for the truck are given below. The company's cost of capital is 11.5%.

Year	Annual Operating Cash Flow	Salvage Value
0	-$22,500		$22,500
1	6,250		17,500
2	6,250		14,000
3	6,250		11,000
4	6,250		5,000
5	6,250		0

a. What is the optimal number of years to operate the truck?

b. Would the introduction of salvage values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?   I. Yes. Salvage possibilities could only lower NPV and IRR.  II. Salvage possibilities would have no effect on NPV and IRR. III. No. Salvage possibilities could only raise NPV and IRR.

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