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Malama's Cafe, Inc., is considering investment in two altemative capital budgeting projects. Project A is an investment of ZMK75000 to replace working but obsolete refrigeration equipment. Project B is an investment of ZMK 150000 to expand dining room facilities. Relevant cash flow data for the two projects over their expected 2-year lives are as follows: PROJECT A YEAR ONE YEAR TWO Cash Flow Probability Cash Flow Probability 0.18 ZMK O 0.08 ZMK O ZMK 50,000 ZMK 100, 000 0.64 0.84 ZMK 50,000 ZMK 100, 000 0.18 0.08 PROJECT B YEAR ONE YEAR TWO Probability 0.50 Cash Flow ZMK O Probability 0.125 Cash Flow ZMK O 0.50 ZMK 200,000 0.75 ZMK 100,000 0.125 ZMK 200, 000 a) Calculate the expected value, standard deviation, and coefficient of variation for cash flows from each project. b) Calculate the risk-adjusted NPV for each project using a 15 per cent cost of capital for the riskier project and a 12 per cent cost of capital for the less risky one. Which project is preferred using the NPV criterion? c) Calculate the PI for each project, and rank the projects according to the PI criterion. d) Calculate the IRR for each project, and rank the projects according to the IRR criterion. e) Compare your answers to parts B, C, and D, and discuss any differences.

Malama's Cafe, Inc., is considering investment in two altemative capital budgeting projects. Project A is an investment of ZMK75000 to replace working but obsolete refrigeration equipment. Project B is an investment of ZMK 150000 to expand dining room facilities. Relevant cash flow data for the two projects over their expected 2-year lives are as follows: PROJECT A YEAR ONE YEAR TWO Cash Flow Probability Cash Flow Probability 0.18 ZMK O 0.08 ZMK O ZMK 50,000 ZMK 100, 000 0.64 0.84 ZMK 50,000 ZMK 100, 000 0.18 0.08 PROJECT B YEAR ONE YEAR TWO Probability 0.50 Cash Flow ZMK O Probability 0.125 Cash Flow ZMK O 0.50 ZMK 200,000 0.75 ZMK 100,000 0.125 ZMK 200, 000 a) Calculate the expected value, standard deviation, and coefficient of variation for cash flows from each project. b) Calculate the risk-adjusted NPV for each project using a 15 per cent cost of capital for the riskier project and a 12 per cent cost of capital for the less risky one. Which project is preferred using the NPV criterion? c) Calculate the PI for each project, and rank the projects according to the PI criterion. d) Calculate the IRR for each project, and rank the projects according to the IRR criterion. e) Compare your answers to parts B, C, and D, and discuss any differences.

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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7:17 PM O A D Å ןה.ןא 288 I31) B/s Reserve Board interest-rate increases. Create a spreadsheet to compare the difference in monthly payments for a K552,451 loan having 60 monthly payments for a select number of interest rates. Use 3% as the base APR and go as high as an APR of 12%. Required: Make your spreadsheet flexible enough to be able to look at the impact of the different interest rates for different loan amounts and different repayment periods. Question Two (Evaluating Projects/probabilistic analysis) Malama's Cafe, Inc., is considering investment in two alternative capital budgeting projects. Project A is an investment of ZMK75000 to replace working but obsolete refrigeration equipment. Project B is an investment of ZMK 150000 to expand dining room facilities. Relevant cash flow data for the two projects over their expected 2-year lives are as follows: PROJECT A YEAR ONE YEAR TWO Probability Cash Flow Probability Cash Flow 0.18 ZMK O 0.08 ZMK O ZMK 50,000 ZMK 100, 000 0.64 0.84 ZMK 50,000 0.18 0.08 ZMK 100, 000 PROJECT B YEAR ONE YEAR TWO Probability Cash Flow Probability 0.125 Cash Flow 0.50 ZMK O ZMK O 0.50 ZMK 200,000 0.75 0.125 ZMK 100,000 ZMK 200, 000 a) Calculate the expected value, standard deviation, and coefficient of variation for cash flows from each project. b) Calculate the risk-adjusted NPV for each project using a 15 per cent cost of capital for the riskier project and a 12 per cent cost of capital for the less risky one. Which project is preferred using the NPV criterion? c) Calculate the PI for each project, and rank the projects according to the PI criterion. d) Calculate the IRR for each project, and rank the projects according to the IRR criterion. e) Compare your answers to parts B, C, and D, and discuss any differences. 3 Question Three (Break-even and Sensitivity) Is it more economical to purchase or rent a home? Evaluate the economics of renting versus buying a ZMK 3,305,238 home and living in it for five years. Use the data below in your analysis. • Rental Option: Rent is ZMK 26,441 per month for the first year. The monthly rental fee will increase by ZMK 550 for each subsequent year of renting. There is also a ZMK 26,441 deposit payable when the lease is signed and refundable when the house is left in good condition. Renter's insurance is ZMK 771 per month.
Transcribed Image Text:7:17 PM O A D Å ןה.ןא 288 I31) B/s Reserve Board interest-rate increases. Create a spreadsheet to compare the difference in monthly payments for a K552,451 loan having 60 monthly payments for a select number of interest rates. Use 3% as the base APR and go as high as an APR of 12%. Required: Make your spreadsheet flexible enough to be able to look at the impact of the different interest rates for different loan amounts and different repayment periods. Question Two (Evaluating Projects/probabilistic analysis) Malama's Cafe, Inc., is considering investment in two alternative capital budgeting projects. Project A is an investment of ZMK75000 to replace working but obsolete refrigeration equipment. Project B is an investment of ZMK 150000 to expand dining room facilities. Relevant cash flow data for the two projects over their expected 2-year lives are as follows: PROJECT A YEAR ONE YEAR TWO Probability Cash Flow Probability Cash Flow 0.18 ZMK O 0.08 ZMK O ZMK 50,000 ZMK 100, 000 0.64 0.84 ZMK 50,000 0.18 0.08 ZMK 100, 000 PROJECT B YEAR ONE YEAR TWO Probability Cash Flow Probability 0.125 Cash Flow 0.50 ZMK O ZMK O 0.50 ZMK 200,000 0.75 0.125 ZMK 100,000 ZMK 200, 000 a) Calculate the expected value, standard deviation, and coefficient of variation for cash flows from each project. b) Calculate the risk-adjusted NPV for each project using a 15 per cent cost of capital for the riskier project and a 12 per cent cost of capital for the less risky one. Which project is preferred using the NPV criterion? c) Calculate the PI for each project, and rank the projects according to the PI criterion. d) Calculate the IRR for each project, and rank the projects according to the IRR criterion. e) Compare your answers to parts B, C, and D, and discuss any differences. 3 Question Three (Break-even and Sensitivity) Is it more economical to purchase or rent a home? Evaluate the economics of renting versus buying a ZMK 3,305,238 home and living in it for five years. Use the data below in your analysis. • Rental Option: Rent is ZMK 26,441 per month for the first year. The monthly rental fee will increase by ZMK 550 for each subsequent year of renting. There is also a ZMK 26,441 deposit payable when the lease is signed and refundable when the house is left in good condition. Renter's insurance is ZMK 771 per month.
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