Basic scenario analysis Prime Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm's financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. These estimates are shown in the following table. Initial investment (CF) Outcome Pessimistic Most likely Optimistic Project A $12,200 Annual cash inflows (CF) $1,510 1,660 1,750 $810 1,660 2,420 Project B $12,200 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 10.2% and that both projects have 15-year lives. Construct a table showing the NPVs for each project for each of the possible outcomes. Include the range of NPVs for each project. a. The range of annual cash inflows for project A is $ (...) (Round to the nearest dollar.)

Basic scenario analysis Prime Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm's financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with each project. These estimates are shown in the following table. Initial investment (CF) Outcome Pessimistic Most likely Optimistic Project A $12,200 Annual cash inflows (CF) $1,510 1,660 1,750 $810 1,660 2,420 Project B $12,200 a. Determine the range of annual cash inflows for each of the two projects. b. Assume that the firm's cost of capital is 10.2% and that both projects have 15-year lives. Construct a table showing the NPVs for each project for each of the possible outcomes. Include the range of NPVs for each project. a. The range of annual cash inflows for project A is $ (...) (Round to the nearest dollar.)

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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Payback Period, IRR, and Minimum Cash Flows The management of Mesquite Limited is currently evaluating the following investment proposal: Year 4 Initial investment $260,000 Net operating cash inflows Time 0 Year 1 Year 2 Year 3 -- $100,000 $100,000 $100,000 $100,000 (a) Determine the proposal's payback period. 2.6 years % (b) Determine the proposal's internal rate of return. (Refer to Appendix 24B if you use the table approach.) (c) Given the amount of the initial investment, determine the minimum annual net cash inflows required to obtain an internal rate of return of 16 percent. Round the answer to the nearest dollar. $
Capital Budgeting Techniques Analyze the two independent projects, X and Y. Each project costs $10,000, and the firm’s required rate of return is 12%. The expected net cash flows are as follows: Outflows Inflows Projects Year 1 2 3 4 X -10,000 6,500 3,000 3,000 1,000 Y -10,000 3,500 3,500 3,500 5,500 Required: Calculate for each project: Payback Period IRR NPV PI Give your decision regarding acceptation and rejection of the project. Explain which criteria you based your decision upon and why?
Required: 1a. Compute the cash payback period for each project. Cash Payback Period Plant Expansion 2 years Retail Store Expansion 2 years 1b. Compute the net present value. Use the present value of $1 table above. If required, round to the nearest dollar. Plant Expansion Retail Store Expansion Total present value of net cash flow Less amount to be invested Net present value 78,782 73,933 2. Because of the timing of the receipt of the net cash flows, the plant expansion offers a higher net present value
Net Present Value Analysis; Uncertain Cash Flows “I’m not sure we should lay out $250,000 for that automated welding machine,” said Jim Alder, president of the Superior Equipment Company. “That’s a lot of money, and it would cost us $80,000 for software and installation, and another $36,000 per year just to maintain the thing. In addition, the manufacturer admits it would cost $45,000 more at the end of three years to replace worn-out parts.” “I admit it’s a lot of money.” said Franci Rogers, the controller. “But you know the turnover problem we’ve had with the welding crew. This machine would replace six welders at a cost savings of $108,000 per year. And we would save another $6,500 per year in reduced material waste. When you figure that the automated welder would last for six years, I’m sure the return would be greater than our 16% required rate of return.” “I’m still not convinced,” countered Mr. Alder. “We can only get $12,000 scrap value out of our old welding equipment if we…
1. Net present value (NPV) Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Cold Goose Metal Works Inc. is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $2,225,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $375,000 Year 2 $500,000 Year 3 $475,000 Year 4 $500,000 Cold Goose Metal Works Inc.’s weighted average cost of capital is 10%, and project Beta has the same risk as the firm’s average project. Based on the cash flows, what is project Beta’s NPV? -$2,997,487 -$297,487 -$888,360 -$772,487 Making the accept or reject decision Cold Goose Metal Works Inc.’s decision to accept or reject project Beta is independent of its decisions on other projects. If…
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True or False Assume that the riskfree rate of return is 5% p.a. and that an investment project costs $150,000 and is expected to generate a risky net cash flow next year of $180,000. The project is acceptable as its internal rate of return exceeds the riskfree rate of return.
Evaluating cash flows with the NPV method The net present value (NPV) rule is considered one of the most common and preferred criteria that generally lead to good investment decisions. Consider this case: Suppose Hungry Whale Electronics is evaluating a proposed capital budgeting project (project Beta) that will require an initial investment of $3,000,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $500,000 Year 4 $475,000 Hungry Whale Electronics’s weighted average cost of capital is 7%, and project Beta has the same risk as the firm’s average project. Based on the cash flows, what is project Beta’s NPV? -$1,152,891 -$1,814,575 -$1,577,891 -$4,577,891 Making the accept or reject decision Hungry Whale Electronics’s decision to accept or reject project Beta is independent of its decisions on other projects. If the firm follows the NPV method, it…
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QUESTION 34 Red Hill Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data: Expected NPV Standard deviation (ONPV) Project beta (vs. market) Correlation of the project cash flows with cash flows from currently existing projects Project X $350,000 $100,000 1.4 Cash flows are not correlated with the cash flows from existing projects Which of the following statements is CORRECT? Project Y $350,000 $150,000 0.8 Cash flows are highly correlated with the cash flows from existing projects a. Project X has more stand-alone risk than Project Y. O b. Project X has more corporate (or within-firm) risk than Project Y. O c. Project X has more market risk than Project Y. O d. Project X has the same level of corporate risk as Project Y. O e. Project…

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