b) Gone Mad Company Limited is considering two mutually exclusive projects to expand its operations, each with an initial investment of $325,000. 1) A new product line to enhance sales 2) Investment in Research and Development (R&D) which is also expected to boost sales. The company's board of directors has set up a minimum 3-year payback period requirement and has set its cost of capital at 9%. The incremental cash inflows associated with the two projects are as follows: Incremental Cash Inflows (CF) Year New Line R&D 1 $120,000 $100,000 2 120,000 115,000 3 120,000 125,000 4 120,000 140,000 i) Calculate the payback period for each project ii) Calculate the NPV of each project at discount rate of 9%. Please show workings. ii) Calculate the Internal Rate of Return of both projects and discuss the findings. (iv) What is your decision based on (i), (ii) and (iii) above? Will your decision change if the firm has capital rationing issues?

b) Gone Mad Company Limited is considering two mutually exclusive projects to expand its operations, each with an initial investment of $325,000. 1) A new product line to enhance sales 2) Investment in Research and Development (R&D) which is also expected to boost sales. The company's board of directors has set up a minimum 3-year payback period requirement and has set its cost of capital at 9%. The incremental cash inflows associated with the two projects are as follows: Incremental Cash Inflows (CF) Year New Line R&D 1 $120,000 $100,000 2 120,000 115,000 3 120,000 125,000 4 120,000 140,000 i) Calculate the payback period for each project ii) Calculate the NPV of each project at discount rate of 9%. Please show workings. ii) Calculate the Internal Rate of Return of both projects and discuss the findings. (iv) What is your decision based on (i), (ii) and (iii) above? Will your decision change if the firm has capital rationing issues?

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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Thornton Company is considering investing in two new vans that are expected to generate combined cash inflows of $26,000 per year. The vans' combined purchase price is $95,500. The expected life and salvage value of each are four years and $20,000, respectively. Thornton has an average cost of capital of 16 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Calculate the net present value of the investment opportunity. Note: Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places. b. Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital and whether it should be accepted. a. Net present value b. Will the return be above or below the cost of capital? b. Should the investment opportunity be accepted? Above Accepted
Shaylee Corp has $2.10 million to invest in new projects. The company’s managers have presented a number of possible options that the board must prioritize. Information about the projects follows: Project A Project B Project C Project D Initial investment $ 720,000 $ 400,000 $ 960,000 $ 1,115,000 Present value of future cash flows 935,000 500,000 1,650,000 1,310,000 Required:1. Is Shaylee able to invest in all of these projects simultaneously?multiple choice No Yes 2-a. Calculate the profitability index for each project. (Round your answers to 4 decimal places.)
Rundle Company is considering investing in two new vans that are expected to generate combined cash inflows of $34,000 per year. The vans' combined purchase price is $93,000. The expected life and salvage value of each are seven years and $21,700, respectively. Rundle has an average cost of capital of 16 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Calculate the net present value of the investment opportunity. Note: Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places. b. Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital and whether it should be accepted. a. Net present value b. Will the return be above or below the cost of capital? b. Should the investment opportunity be accepted?
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Lin-ay sang Subay is considering a P600,000 investment in a new equipment that is anticipated to produce the following net cash inflows: Year 1, P125,000; Year P245,000; Year 3, P185,000; Year 4, P105,000 and Year 5, P240,000. If the cash flows occur throughout the year, what is the equipment discounted payback period assuming cost of capital of 9% p.a.?
Giggins Limited is planning to expand its business. The expansion will cost £350,000 initially to purchase new premises and a further £150,000 to purchase equipment. Net cash inflows from the next seven years ofthe project are as follows:Year Net cash inflows1 60,0002 80,0003 130,0004 150,0005 175,0006 250,0007 275,000In which year would Giggins' investment be fully recovered?
Two competing project proposals, 1 and 2, are currently under consideration for the manufacture of a new product line. Information for each of the projects is as follows, with cash flows stated in nominal terms: Project Estimated life 1 2 3 years $200 000 5 years $600 000 Initial outlay Annual after-tax cash flows $175 000 $245 000 1.1 Assume that projects 1 and 2 are of average risk to the firm, and the firm's cost of capital is 5.5% p.a., stated in real terms. If inflation is expected to be 4.25% p.a. for each of the next five years, calculate the net present value of each project. Round your answer off to the nearest dollar. 1.2 Which of the two projects you will select to implement? Motivate your answer.
Campbell Company is considering investing in two new vans that are expected to generate combined cash inflows of $30,000 per year. The vans' combined purchase price is $96,500. The expected life and salvage value of each are five years and $20,300, respectively. Campbell has an average cost of capital of 14 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Calculate the net present value of the investment opportunity. Note: Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places. b. Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital and whether it should be accepted. a. Net present value b. Will the return be above or below the cost of capital? b. Should the investment opportunity be accepted? Above Accepted 4
Langley Company is considering two capital investments. Both investments have an initial cost of $10,000,000 and total net cash inflows of$16,000,000 over 10 years. Langley requires a 10% rate of return on this type of investment. Expected net cash inflows are as followsI can't seem to understand how to do this question! Thank you :)
Panthers plc is considering a project which will generate cash flows of £5,000 each year from years 3 to 7. The company has a cost of capital of 14%. What is the total present value of the cash flows? a) £21,440 b) £13,210 c) £17,090 d) £17,165
Sunshine Corporation is reviewing an investment proposal. The initial cost of the investment is R52 500. The estimated cash flows and net profit for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. Year Net cash flows Net profit1 R20 000 R2 5002 R17 500 R3 5003 R15 000 R4 5004 R12 500 R5 5005 R10 000 R6 500 The cost of capital is 12%.Required:Calculate the following:1. Payback Period 2. Net Present value 3. Accounting rate of return

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