5.2 D'Arcy (Builders) Ltd is considering three possible investment projects: A, B and C. The expected pattern of cash flows for each project is:Project cash flowsAB£m£m£mInitial outlay(17)(20)(24)1 year's time111292 years' time3 years' time4 years' time797711613The business has a cost of capital of 10 per cent and the investment budget for next year is £25 million.Required:Which investment project(s) should the business undertake assuming each project is:(a) divisible(b) indivisible?

NPV or net present value is discounting the cash inflows to see the present value of the cash…

D'Arcy (Builders) Ltd is considering three possible investment projects: A, B and C. The expected pattern of cash flows for each projec Project cash flows A B £m £m £m Initial outlay (17) (20) (24) 1 year's time 2 years' time 3 years' time 4 years' time 11 12 7 9 7 7 11 6 6 13 The business has a cost of capital of 10 per cent and the investment budget for next year is £25 million. Required: Which investment project(s) should the business undertake assuming each project is: (a) divisible (b) indivisible?

D'Arcy (Builders) Ltd is considering three possible investment projects: A, B and C. The expected pattern of cash flows for each projec Project cash flows A B £m £m £m Initial outlay (17) (20) (24) 1 year's time 2 years' time 3 years' time 4 years' time 11 12 7 9 7 7 11 6 6 13 The business has a cost of capital of 10 per cent and the investment budget for next year is £25 million. Required: Which investment project(s) should the business undertake assuming each project is: (a) divisible (b) indivisible?

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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The table below is a forecast of annual net cashflows on a business project with a five-year lifespan. Year 1 2 3 4 5 Net Cash Flow -£50,000 £185,000 £370,000 £450,000 £110,000 An investment analyst, having assessed the risks, suggests an annual cost of capital for the project of 8.25%. Required: a) Calculate the present value of the forecast net cash flows based on the minimum required return. b) The project requires an initial investment of £800,000. Calculate the net present value. c) Outline the case for using the net present value principle as an investment decision-making tool and explain why investors should accept or reject the above investment opportunity.
A project requires an investment of $1000 and generates a cash flow of $1000 in 1 year and another $1000 in 5 years. What is the IRR? A. 16.87% B. 25.13% C. 32.47% D. 38.16%
XYZ Corporation is considering a capital budgeting project and requires a detailed analysis. The company has provided youwith the following financial information and ratios:Return on Investment (ROI): 15%Payback Period: 3 yearsNet Present Value (NPV): R50,000Internal Rate of Return (IRR): 12%Cash Flows:Year 1: R20 000Year 2: R30 000Year 3: R40 0001.4 Calculate the ARR for XYZ Corporation. Assume depreciation is calculated on the straight-linemethod and that the project has a scrap value of R5000
You have been asked by MPAC Ltd to analyse two projects, X and Y. Each project costs £1,000,000, and the company's cost of capital is 10 percent per annum. The expected net cash flows are as follows: Project X £600,000 £500,000 £300,000 £100,000 Project Y £200,000 £300,000 £400,000 £675,000 Year 1 3 4 Required: Calculate the following for each project: i) ii) iii) a) net present value modified internal rate of return discounted payback period b) Which project(s) should be accepted if they are independent? Explain why. c) How might a change in the cost of capital produce a conflict between the net present value and internal rate of return rankings of these two projects? Would this conflict exist if the cost of capital were changed? Why does the conflict exist? Discuss critically.
BIASA Corporation has four investment projects with the following costs and estimated expected rates of return (i.e. internal rates of return estimated from the discounted cash flow analysis): Cost IRR Project 1 $2,900,000 17% Project 2 $3,200,000 15% Project 3 $3,500,000 13% Project 4 $2,700,000 12% The company has a capital budget set for the coming year of $4 million, i.e. the maximum capital expenditure is set at $4 million. The company estimates that it can issue debt at a before-tax cost of 8% and its tax rate is 30%. The company can also issue preference shares at $45 per share, which pay a constant dividend of $4.50 per share per year. The company’s stock currently sells at $33 per share. The next dividend D1 is expected to be $3.20 and the dividend is expected to grow at a constant rate of 5% per year. The company’s capital structure consists of 75% ordinary shares 20% debt and 5% preference shares. (a) Which project(s) should…
Accounting Draw the cash flow diagram for the given project below and then calculate the project net profit. The following table shows the activities description, dependency, duration, and cost elements. Assume the followings: Project overhead 8%. Tax 3%. Bond 1.25%. Profit 6%. Interest rate 9% per year. Down payment 10% with a guarantee letter, which costs 0.25% per month paid to the bank at the project start date. A performance guarantee letter of 10% will be submitted from contractor at the project begin. Invoices are submitted every month and will be paid a month later. Retention 10% and will be paid at the last invoice. Subcontractors: retention 10% will be paid at the last invoice, down payment 20%. Labor: labor expenses to be paid bi-weekly. Equipment: equipment expenses
Consider the investment project with the following net cash flows: What would be the value of X if the project's IRR is 25%?
u) Project P rcquires an mycsiment of $95,000 and is expected to produce cash inflow of $20,000 per ycar for 8 years. The cost of capital is 11% Required: a) Pay-back period b) NPV c) PI d) IRR Should you acccpt the project? Why or why not?
13. An investment requires working capital equal to 15% of the year’s sales revenue to be in place at the start of the relevant year. The sales revenue for the three year project is forecast as £80,000, £100,000 and £90,000. What is the cashflow relating to working capital at time 2? A £1,500 outflow B £3,000 outflow C £1,500 inflow D £3,000 inflow
Har
Joliet Company is considering two alternative investments. The company requires an 18% return from its investments. Category Project X Project Y Initial Investment 108,000 $98,000 Net cash flows anticipated: Year 1 36,000 25,000 Year 2 39,000 45,000 Year 3 32,000 42,000 Year 4 34,000 28,000 Year 5 25,000 17,000 Compute the IRR for both Projects and recommend one of them.
Suppose a company has the following three projects and limits it capital budget to $50,000. Projects Present Value of Cash Inflows Initial Investment A $40,000 $25,000 B 37,500 25,000 70,000 50,000 1. Calculate the projects' NPVs. 2. Calculate the projects' PIs. 3. Which project(s) should the company choose? Why?

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