FIN 6020v19fPerez Company:Mutually Exclusive Projects with Different Lives. Ch 10 (10-17)Again, you are considering two mutually exclusive projects.Machine A: This project costs $10 million. The expected net cash flows are $4 million per year for 4years, when is to be replaced.Machine B: It costs $15 million, and has expected cash flows of $3.5 per year for 8 years, when it will bereplaced.The cost of capital is 10%. Machine prices are expected to stay steady as production efficiencies areexpected to offset inflation.Evaluate these projects.a. Calculate NPV, IRR, Replacement Chain, and Equivalent Annual Annuity.b. Which project should be company accept?

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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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Explain all point of question with proper explanation.
You are evaluating a project that will cost $500,000 but is expected to produce cash flows of $125,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11% and your company's preferred payback period is three years or less. What is the payback period of this project? The payback period is ____ years. (Round to two decimal places)
Your firm is considering a project that requires in investment of $156,000 today. It is projected to pay $47,000 at the end of the year and at the end of the next two years after that (i.e., the cash flows at t = 1, 2, and 3 are all $47,000). Four years from today, the project is projected to pay $76,000. If the appropriate discount rate to value this project is 12% per year, what is the NPV ? Round and express your answer to the nearest whole dollar (i.e., nearest integer).
Consider two investment projects, both of which require an upfront investment of $10 million and pay a constant positive amount each year for the next 12 years. Under what conditions can you rank these projects by comparing their IRRS? (Select the best choice below.) A. Ranking by IRR will work in this case so long as the projects' cash flows do not decrease from year to year. B. Ranking by IRR will work in this case so long as the projects' cash flows do not increase from year to year. C. Ranking by IRR will work in this case so long as the projects have the same risk. D. There are no conditions under which you can use the IRR to rank projects.
A project that will provide annual cash flows of $2,600 for nine years costs $10,700 today? a. At a required return 12%, what is the NPV of the project? (DO NOT ROUND INTERMEDIATE CALCULATIONS AND ROUND YOUR ANSWER TO 2 DECIMAL PLACES) b. At a required return of 28%, what is the NPV of the project? (DO NOT ROUND INTERMEDIATE CALCULATIONS AND ROUND YOUR ANSWER TO 2 DECIMAL PLACES) c. At what discount rate would be indifferent between accepting the project and rejecting it? (DO NOT ROUND INTERMEDIATE CALCULATIONS AND ROUND YOUR ANSWER TO 2 DECIMAL PLACES) Could someone please help me solve this in excel?
The initial cost of a project is $18 million. If a project returns $3 million at year 1 and that cash flow increases by $2 million each year afterwards, what is the payback period? The initial cost of a project is $18 million. If a project returns $3 million at year 1 and that cash flow increases by $2 million each year afterwards, what is the payback period? 5.77 years 4.25 years 3.33 years 2.66 years
You have estimated that the initial revenues will be $100million per year and grow at a rate of 45% per year for four years. Due to political risk,you decide to use only a four-year horizon for planning purposes. Variable costs areexpected to be 70% of sales; fixed costs are projected to be $10 million per year. Initialcost of machinery, land, equipment, and other things amounts to $110 million. This $110million will be depreciated straight-line to zero over a seven-year accounting life.However, the expected market value of the fixed assets at the end of four years is $50million. Net working capital requirements are minimal, just $10 million at the beginningof the project, all of which will be recovered at termination. Tax rate of your company is30%. This project will be financed with both debt and equity. The plan is to mirror thefirm’s target capital structure by issuing 15 million shares of stock priced at $10.00 a shareand $170 million face value of 10-year bonds which will be…
Suppose an opportunity arises to invest $10 million that will pay $5.5 million at the end of year 1 and $6.5 million at the end of year two. The cost of capital is 10%. Find NPV. Is the project a go? Show and explain Suppose the project’s cash flows are delayed a year, but not the outlay. How does that change your answer? Show and explain Suppose there is a cost overrun of 20%. The cash flows and their timing are the same as in part a. How does this change your answer? Show and explain. Suppose the second-year cash flow decreases to $5 million. The outlay and timing of the cash flows are the same as in part a. How does this change your answer? Show and explain. Evaluate the proposal. Would you undertake it?
You are considering opening a new plant. The plant will cost $95.1 million up front and will take one year to build. After that it is expected to produce profits of $31.8 million at the end of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 7.6%. Should you make the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The NPV of the project will be $ million. (Round to one decimal place.)
We are examining a new project. We expect to sell 8,800 units per year at $191 net cash flow apiece (including CCA) for the next 16 years. In other words, the annual operating cash flow is projected to be $191 × 8,800 = $1,680,800. The relevant discount rate is 10%, and the initial investment required is $5,590,000. Suppose you think it is likely that expected sales will be revised upward to 9,550 units if the first year is a success a. If success and failure are equally likely, what is the NPV of the project? Consider the possibility of abandonment in answering. (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) NPV $ b. After the first year, the project can be dismantled and sold for $2,846,000. What is the value of the option to abandon? (Negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) The value…
A project will have an initial investment requirement of $5,000. Then, it will generate 5 years of $1,000 per year, with all cash expected to be received at the end of the year. The discount rate is 10%. The hurdle rate is the same as the discount rate, 10%. 9.What is the NPV? 10.What is the Payback? 11.What is the IRR. 12.Do you accept this project? 13.At WHAT HURDLE RATE would the project result in an NPV of exactly $0?
Your firm is considering a project that will cost $4.59 million up front, generate cash flows of $3.52 million per year for 3 years, and then have a cleanup and shutdown cost of $6.01 million in the fourth year. a. How many IRRS does this project have? b. Calculate a modified IRR for this project assuming a discount and compounding rate of 9.9%.

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