Mod 9 chpter 24

TOPIC 6: CAPITAL BUDGETING TECHNIQUES ABC Manufacturing is considering two (2) mutually exclusive investments. The company wishes to use a CAPM-Type risk-adjusted discount rate (RADR) in its analysis. ABC's managers believe that the appropriate market rate of return is 10%, and they observe that the current risk-free rate of return is 5%. Cash flows associated with the two (2) projects are shown in the table below Project x $110,000 Project y $120,000 Year Net Cash Inflows (NCFt) 1 $40,000 $32,000 2 $40,000 $42,000 3 $40,000 $48,000 4 $40,000 $56,000 Answer the following questions: a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has a RADR factor (Risk Index) of 1.20 and project Y has an RADR factor (Risk Index) of 1.4. Please note that the RADR factors are similar to project betas. b. Discuss your findings in part a and recommend the preferred project.

9. Profitability index Estimating the cash flow generated by $1 invested in a project The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Consider this case: Purple Whale Foodstuffs Inc. is considering investing $2,750,000 in a project that is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 $450,000 $500,000 $500,000

Question 4: Capital Budgeting a). Consider the following two mutually exclusive projects: YEAR 0 CASH FLOW (A) -$300,000 1 20,000 2 70,000 3 80,000 4 400,000 CASH FLOW (B) -$39,000 18,000 12,000 18,000 19,000 Whichever project you choose, if any, you require a 15 percent return on your investment. (i) If you apply the payback period (PBP) criterion, which investment will you choose? Why? (ii) If you apply the net present value (NPV) criterion, which investment will you choose? Why? (iii)If you apply the profitability index (PI) criterion, which investment will you choose? Why? (iv) If you apply the internal rate of return (IRR) criterion, which investment will you choose? Why? (v) Based on your answers in (i) through (iv), which project will you finally choose? Why? Examiner: Prof. Ebenezer Bugri Anarfo Page 9 b). You are trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $15 million, which will be…

B Assume the following information for a capital budgeting proposal with a five-year time horizon: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket costs This proposal's simple rate of return is closest to: Multiple Choice O 27%. 16%. 19% 11% $ 485,000 $ 300,000 $ 130,000 $ 50,000 $ 40,000

Question 6   A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500 and finally in year four, $4,000. The profitability index is 1.14 and the discount rate is 12 percent. What is the initial cost of the project?    Group of answer choices   $9,211.06 $9,250.00 $8,166.19 $7,899.16 $8,098.24

which one is correct please confirm? QUESTION 19 Whipple Industries Inc. is in the process of determining its optimal capital budget for next year. The following investment projects are under consideration:   Required Expected Rate Project Investment of Return A $2 million   20.0% B $3 million 15.0% C $1 million 13.5% D $4 million 13.0% E $1 million 12.5% F $3 million 12.0% G $5 million 11.5% ​ The firm's marginal cost of capital schedule is as follows: Amount of   Funds Raised Cost $0 - $6 million 12.0% $6 million - $12 million 12.5% $12 million - $18 million 13.5% Over $18 million 15.0% ​ Determine Whipple's optimal capital budget (in dollars) for the coming year.   a. $5 million   b. $10 million   c. $14 million   d. $11 million

EXERCISE 3: CASH INFLOWS AND CASH OUTFLOWS With the following capital budgetng elements, identify the cash outflows and cash inflows that you would use to judge the attractiveness of a project by using the time- value-of money yardstıcks capital assets ($1.5 million), working capital in year 1 ($500,000) and year 2 ($200,000), salaries ($140,000), working capital loan ($190,000). residual value at the end of the 11th year ($1 million), profit for the years 1 to 10 ($300,000), mortgage ($1.1 million), non-cash expense ($50,000), revenue ($300,000), and sunk costs ($100,000). The project's lifespan is 10 years and the cost of capital is 8%.

Capital Budgeting   Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these.     Time Project A Cash Flows Project B Cash Flows 0 -$46,800 -$63,600 1 -21,600 20,400 2 43,200 20,400 3 43,200 20,400 4 43,200 20,400 5 -28,800 20,400     Sketch the NPV profile for projects A & B.

Capital Budgeting   Assume you are evaluating two mutually exclusive projects, the cash flows of which appear below and that your company uses a cost of capital of 13% to evaluate projects such as these.     Time Project A Cash Flows Project B Cash Flows 0 -$46,800 -$63,600 1 -21,600 20,400 2 43,200 20,400 3 43,200 20,400 4 43,200 20,400 5 -28,800 20,400     If Project A and Project B are independent, which project should be undertaken?

Please help with formulas:

What is the difference between NPV and IRR?  Which one would you choose for evaluating a potential investment and why? Be sure to support reasoning with evidence for each capital budgeting metric (i.e., the NPV and IRR).

Assignment: Capital Budgeting DecisionsYour company is considering undertaking a project to expand an existing product line. The required rate of return on the project is 8% and the maximum allowable payback period is 3 years. Time 0 1 2 3 4 5 6Cash Flow $(10,000) $2,400 $4,800 $3,200 $3,200 $2,800 $2,400 QuestionsEvaluate the project using each of the following methods. For each method, should the project be accepted or rejected? Justify your answer based on the method used to evaluate the project’s cash flows. Net Present Value