A firm is evaluating a project which requires Rs.10 million in investments. The Firm's financial manager is proposing two options to finance the project. First, all equity financing; second, Rs. 5 million. through 15% debentures are issued at par, and Rs. 5 million of ordinary equity. The managers expect three possible EBITs for this project, i.e., 1.5, 2, and 2.8 million. You have to determine when the manager would use the first and second financing options

A firm is evaluating a project which requires Rs.10 million in investments. The Firm's financial manager is proposing two options to finance the project. First, all equity financing; second, Rs. 5 million. through 15% debentures are issued at par, and Rs. 5 million of ordinary equity. The managers expect three possible EBITs for this project, i.e., 1.5, 2, and 2.8 million. You have to determine when the manager would use the first and second financing options

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Delta Plc is considering investing in bespoke software solutions, which requires an initial investment of £130,000. The annual cash inflows during years 1-3 are expected to be £38,000 for year 1; £43,000 for year 2 and £50,000 for year 3. The company’s money cost of capital is 6% and inflation is expected to be 3% during the life of the project. a) Calculate the ARR of the project, taking inflation into account. b) Calculate the (undiscounted) Payback Period of the project, taking inflation into account. c) Calculate the NPV of the project using the money cost of capital as the discount rate. d) Calculate the NPV of the project using the real rate of return as the discount rate (round up to 2 decimal places). e) Discuss the impact that the decision made on the project acceptance based on the money cost of capital and real rate of return would have on Delta Plc.
Darin Clay, the CFO of MakeMoney.com, has to decide between the following two projects: Project Million 0 -$2,700 10+ 310 2 1,110 3 1,950 Year Project Billion -$10 lo+ 1,150 1,950 3,100 The expected rate of return for either of the two projects is 12 percent. What is the range of initial investment (lo) for which Project Billion is more financially attractive than Project Million? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Initial investment less than $ 5,530.00
Darin Clay, the CFO of MakeMoney.com, has to decide between the following two projects: Year 0 1 2 3 Project Million -$ 2,800 10 + 320 1,120 2,000 Project Billion -$10 /0 +1,200 2,000 3,200 The expected rate of return for either of the two projects is 13 percent. What is the range of initial investment (/o) for which Project Billion is more financially attractive than Project Million? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Initial investment
The business is considering a project and is not sure which of these two projects to embark on. The initial investment is £15,000, and the interest rate is 2%, estimating that the investment will provide the following cashflows for 5 years: Project A (£) Project B (£) CF1 2,000 5000 CF2 8000 6000 CF3 9000 1000 CF4 3000 4000 CF5 5000 2400 You must explain to the Board the viability of this investment using the net present value (NPV) criterion. Based on the above information, answer the following question • What is the NPV of each investment? • Is the investment viable? If yes, why? Simple Interest and Compound Interest 1. One of the directors suggested that the company invests £4200 in a Platinum Saver Account which pays 6.3% interest per annum. How much simple interest will the company receive after 4 years? 2. He also suggested investing £1200 for four years, and wondered how much that investment will be worth if they paid 12%…
Assume a company is going to make an investment of $300,000 in a machine and the following are the cash flows that two different products would bring in years one through four. The company's required rate of return is 12%. What is the NPV for Option A? What is the NPV for Option B? What is the IRR for Option A? What is the IRR for Option B? PLEASE NOTE #1: The dollar amounts will be with "$" and commas as needed and rounded to two decimal places (i.e. $12,345.67). Round your IRR answers, in percentage format, to two decimal places (i.e. 12.34%). Given the above answers, which project should the company invest in? Project . PLEASE NOTE #2: Your answer is either "A" or "B" - capital letter, no quotes.
Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the cost of capital for the firm's levered equity is closest to:
s
KAPE Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of 100,000. Their cashflows as follow: Year A B C D 1 10,000 50,000 25,000 0 2 20,000 40,000 25,000 0 3 30,000 30,000 25,000 45,000 4 40,000 0 25,000 55,000 5 50,000 0 25,000 60,000 Evaluate and rank each alternative based on: discounted payback period (use a 10% for cost of capital), net present value (use 10% discount rate) internal rate of return
Your friend offers you an investment opportunity. If you give him $1,200 today, his project will provide you with the following cash flows in Years 1-4: $100, $200, $600, $550. You required 10% return on investments of this risk level. Alternatively, you can invest your $1,200 in the money market fund at 4% today. Which of the two options is a better investment opportunity? Q4. There are two different ways to answers the question (both lead to the same conclusion). Show the complete formula (not the calculator shortcuts) with all the necessary terms that you would use to solve the problem as if you didn't have a financial calculator on hand. Q5. Circle the better investment opportunity: Friend's project / Money market fund
Co. has an investment opportunity (Project B) that requires a cash outlay of $18,000 today. They estimate that they will receive in exchange $6,200 in year 1, $6,500 in year 2, and $8,200 in year 3. Our Co 10. Marvelous me a) What are the IRR and the NPV of Project B? b) If the discount rate is 10%, would you invest in Project B? c) Let's imagine that we had a second project (Project B) that has an IRR of 18%. If the crossover rate between these two projects is 13%, which project would you choose when the appropriate discount rate is below that crossover rate?
You want to find the NPV of a two-period (two-year) project. The free cash flow (FCF) for the initial period (year 0) is -$100,000, for year 1 it is $50,000, while for the second year it is $80,000. It is financed 60% through a bank loan (which lasts two years) and 40% through the issuance of shares.The interest rate of the loan (for $100,000) is 2% bimonthly overdue.The interest rate of the loan (for $100,000) is 2%, due bimonthly. The tax rate is 35%. For the equity issue, the risk-free rate is estimated to be 3% overdue trimester, and the expected market rate of return is 5% overdue trimester, and the beta to be used for the project is 1.2. The NPV of this project is: For the issuance of shares, the risk-free rate is estimated to be 3% Quarterly Past Due, and the expected market rate of return is 5% Quarterly Past Due, and the beta to be used for the project is 1.2. The NPV of this project is:
A firm has two possible investments with the following cash inflows. Each investment costs $435, and the cost of capital is seven percent. Use Appendix B and Appendix D to answer the questions. Assume that the investments are not mutually exclusive and there are no budget restrictions. Cash Inflows Year A B 1 $ 270 $ 170 2 140 170 3 100 170 Based on each investment’s net present value, which investment(s) should the firm make? Use a minus sign to enter negative values, if any. Round your answers to the nearest dollar. Investment A: $ Investment B: $ The firm should make . Based on each investment’s internal rate of return, which investment(s) should the firm make? Round your answers to the nearest whole number. Investment A: % Investment B: % The firm should make . Is this the same answer you obtained in part b? It the same answer as obtained in part b. If the cost of capital were to increase to 9 percent, which investment(s) should the firm…

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