Mala Prohibita Inc. is evaluating a proposal to acquire a new equipment. The equipment wouldrequire an investment of P417,860, including freight and installation cost of P40,000. It expected to have a 10-year life with no scrap value at the end of its life. It has been estimated that the new equipment would increasethe company's cash inflows, net of expenses and income taxes by P68,000. The company can issue its 7%P1,000 par value bond to fund the project. The same type of bond is available in the market at P932.04836 perbond with interest payable semi-annually for ten years. The company is subject to 32% income tax.Determine the Cost of Capital (k)Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answer.

Financial management decision start with getting idea of fund need for a project. A firm have lot of…

Answered: Determine the Cost of Capital (k) Using…

Determine the Cost of Capital (k) Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answer.

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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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Mala Prohibita Inc. is evaluating a proposal to acquire a new equipment. The equipment would
require an investment of P417,860, including freight and installation cost of P40,000. It expected to have a 10-
year life with no scrap value at the end of its life. It has been estimated that the new equipment would increase
the company's cash inflows, net of expenses and income taxes by P68,000. The company can issue its 7%
P1,000 par value bond to fund the project. The same type of bond is available in the market at P932.04836 per
bond with interest payable semi-annually for ten years. The company is subject to 32% income tax.
Determine the Cost of Capital (k)
Using NPV and IRR method, give your recommendation if the company should push the project or not. Explain your answer.

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Weighted average cost of capital (WACC) reflects the average cost of all capital components proportional to their use in the overall cost of the project. true or false?
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Which of the following statements is CORRECT? a. The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. b. An NPV profile graph shows how a project's payback varies as the cost of capital changes. O c. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. d. An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life. e. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.
The net present value (NPV) method estimates how much a potential project will contribute to Business ethics/Shareholders Wealth/Employee Benefits, and it is the best selection criterion. The Smaller/Larger the NPV, the more value the project adds; and added value means a Higher/Larger stock price. In equation form, the NPV is defined as: CFt is the expected net cash flow at Time t, r is the project's risk-adjusted cost of capital, N is its life, and cash outflows are treated as negative cash flows. The NPV calculation assumes that cash inflows can be reinvested at the project's risk-adjusted RD/RS/WACC. When the firm is considering independent projects, if the project's NPV exceeds zero the firm should Accept/Reject the project. When the firm is considering mutually exclusive projects, the firm should accept the project with the Lowest Positive/Lowest Negative/Highest Postive/ Highest Negative NPV.Quantitative Problem: Bellinger Industries is considering two projects for inclusion…
How can you explain the concept of cost of capital? Do you believe that a firm should use the same cost of capital for all of its projects? Why or why not?
Critically assess, how MNEs make Investment, Capital Budgeting and Capital Structure Decisions?
1. Define capital expenditures and provide examples of capital expenditures.2. Cash flows for a particular project should be measured on an incremental basis. What does that mean?3. How does the opportunity cost concept affect capital budgeting cash flow determination?4. What factors should be considered when estimating a new business’ NINV? Is it any different for an asset replacement project. 5. Why is depreciation, a noncash expense, considered when estimating a project’s net cash flows?6. What are the potential tax consequences of selling an old asset in an asset replacement investment decision?
explain that when developing a working capital policy, the entrepreneur determines the joint impact of the level of working capital investment and financing on profitability and risk,and Compare the three alternative working capital policies. Which policy would you consider implementing should you want a venture to show a higher expected profitability?
Explain the conditions under which a company’s WACC is appropriate to use as the cost of capital when evaluating the company’s projects.
The weighted average cost of capital is used to determine whether or not a project should be done. true false
Select all that are true with respect to the NPV rule for making capital investment decisions. Group of answer choices When done correctly, NPV directly measures expected value creation NPV ignores cash flows in the distant future NPV causes decision makers to be myopic For independent projects, all positive NPV projects should be taken, and negative NPV projects should not be taken For mutually exclusive projects, choose the project with the highest NPV
The average accounting rate of return (AAR): Select one: A. is the best method of financially analysing mutually exclusive projects. B. is similar to the return on assets ratio. C. measures net income as a percentage of the sales generated by a project. D. considers the time value of money. E. is the primary methodology used in analyzing independent projects.

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