1. Capital budgeting. (10 points) Calculate initial investment, appropriate cash flows, and use the net present value criteria to evaluate the following investment opportunity: Current revenues 2000 Expected new revenues 3000 Cash outflows (CGS) Old 1500 Cash outflows (CGS) New 2000 Price of project 500 Life of project 5 Cost of funds 20% Tax rate 40% Revenues from old equipment 250 Book value of old equipment 50 Change in NWC 62.4648463 Residual value new equipment 0 a. Initial investment: b. Intermediate cash flows (or their PV) c. Net present value: d. Accept/reject? Why? Explanation:
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Initial investment: The initial investment is the cost of the project, which is not given in the question. Without this information, we cannot calculate the initial investment. b. Intermediate cash flows (or their PV): To calculate the intermediate cash flows, we Show more…
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10-1 - NPV A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project's NPV? (Hint: Begin by constructing the timeline) 10-2 - IRR Refer to problem 10-1. What is the project's IRR? 10-3 - MIRR Refer to problem 10-1. What is the project's MIRR? 10-4 - Profitability Index Refer to problem 10-1. What is the project's PI? 10-5 - Payback Refer to problem 10-1. What is the project payback period? 10-6 - Discounted payback Refer to problem 10-1. What is the project discounted payback period? 10-7 - NPV Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows: YEAR PROJECT A PROJECT B 1 $ 5,000,000 $20,000,000 2 10,000,000 10,000,000 3 20,000,000 6,000,000 A. What are the two projects' net present values, assuming the cost of capital is: a) 5%? b) 10%? c) 15%? B. What are the two project's IRRs at the same cost of capital?
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Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital investment proposal? (A) Increase in net working capital requirements (B) Cost of installing new equipment (C) Sunk costs (D) After-tax salvage value of old equipment (E) All of the above should be considered.
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Consider the following investment cash flows: Year Cash Flow 0 ($1,000) 1 250 2 400 3 500 4 600 5 600 a. What is the return expected on this investment measured in dollar terms if the opportunity cost rate is 10 percent? b. Provide an explanation, in economic terms, of your answer. c. What is the return on this investment measured in percentage terms? d. Should this investment be made? Explain your answer.
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