Problems.Problem 1. A division in a large company has been allocated $160 millionfor capital projects this year. Managers have proposed five projects for thebudgeting committee to consider. The committee would like tomaximize the total NPV. What projects should be selected?•There is one project of each type, each project has an estimated NPV(net present value, a measurement of profit) and each requires acapital expenditure (this comes out of the budget above).• At least 2 projects must be done.• If Project 5 is chosen, Project 1 must be done as well.Project 1 Project 2 Project 3 Project 4 Project 5NPV (in millions of $)101716814Expenditure (millions of $)4896803264a. What are your decision variables (x)? State the units for each.b. Write down your objective function (include min/max with theequation) and constraints below, includedescriptions/explanations/calculations on the right. Delete/add rows asneeded.(objective function above, constraints below)

Define Decision Variables:We're dealing with a project selection problem. Here's how we define the…

Answered: Problems. Problem 1. A division in a…

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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2. Internal rate of return (IRR) The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider this case: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,600,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company's WACC is 10%, and project Delta has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $350,000 $475,000 $425,000 $500,000 Which of the following is the correct calculation of project Delta's…
Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 12%. 0 1 2 3 Project A -1,450 650 250 Project B -1,450 What is Project A's MIRR? Do not round intermediate calculations. Round your answer to two decimal places. 435 370 260 410 310 760 What is Project B's MIRR? Do not round intermediate calculations. Round your answer to two decimal places. If the projects were independent, which project(s) would be accepted according to the MIRR method? -Select- If the projects were mutually exclusive, which project(s) would be accepted according to the MIRR method? -Select-
Romanos Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Laura Berenstein, staff analyst at Romanos, is preparing an analysis of the three projects under consideration by Chester Romanos, the company's owner. Data Table A B C D 1 Project A Project B Project C 2 Projected cash outflow 3 Net initial investment $3,000,000 $2,100,000 $3,000,000 4 Projected cash inflows 5 Year 1 $1,200,000 $1,200,000 $1,700,000 6 Year 2 1,200,000 600,000 1,700,000 7 Year 3 1,200,000 500,000 200,000 8 Year 4 1,200,000 100,000 9 Required rate of return 10% 10% 10% 1. Because the company's cash is limited, Romanos thinks the payback method should be used to choose between the capital budgeting projects. a. What are the…
Halls Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Laura Bentley, staff analyst at Halls, is preparing an analysis of the three projects under consideration by Caden Halls, the company's owner. Data Table A B C D 1 Project A Project B Project C 2 Projected cash outflow 3 Net initial investment $3,000,000 $2,100,000 $3,000,000 4 Projected cash inflows 5 Year 1 $1,200,000 $1,200,000 $1,700,000 6 Year 2 1,200,000 600,000 1,700,000 7 Year 3 1,200,000 500,000 200,000 8 Year 4 1,200,000 100,000 9 Required rate of return 6% 6% 6 1.. Calculate the payback period for each of the three projects. Ignore income taxes. Using the payback method, which projects should Halls choose?. Ignore income taxes. (Round your answers to…
The Basics of Capital Budgeting Your division is considering two projects with the following cash flows (in millions): 0 1 2 3 Project A -$31 $7 $12 $22 Project B -$19 $13 $6 $5 What are the projects' NPVs assuming the WACC is 5%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places. Project A: $___ million Project B: $___ million What are the projects' NPVs assuming the WACC is 10%? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Negative values, if any, should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to two decimal places. Project A: $___ million Project B: $___ million What are the projects' NPVs assuming the…
Consider this case: Suppose Green Caterpillar Garden Supplies Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 450,000 Year 3 500,000 Year 4 400,000 Green Caterpillar Garden Supplies Inc.’s weighted average cost of capital is 9%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)? (Note: Do not round your intermediate calculations.) $1,219,319 $1,269,319 $1,319,319 $819,319
2. Calculating Project NPV The Fleming Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 22 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Investment Sales revenue Operating costs Depreciation Net working capital spending Year 0 $32,800 450 Year 1 Year 2 Year 3 Year 4 $14,200 2,100 8,200 175 $15,900 $15,700 2,100 2,100 8,200 8,200 250 275 $12,900 2,100 8,200 ? a. Compute the incremental net income of the investment for each year. b. Compute the incremental cash flows of the investment for each year. c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?
A sky resort is studying a half a dozen capital improvement projects.It has collected shs.1 million for capital budgeting purposes.The following proposals and assosciated probability =indexes have been determined.The projects themselves are independent of one another. Project Amount Profitability A 500000 1.21 B 150000 0.95 C 350000 1.20 D 450000 1.18 E 200000 1.20 F 400000 1.05 a)With strict capital rationing,which of these investements should be undertaken? b)Is this an optimal strategy,why?
As the director of capital budgeting for Colorado Corporation, you are evaluating two mutually exclusive projects with the following net cash flows: Year a) b) c) 0 1 2 3 4 5 Project A Cash Flow I would choose ($) -155,000 39,500 55,000 Given Colorado's cost of capital is 12 percent: NPV and IRR of project A are $.......... NPV and IRR of project B are $...….......….... 42,000 35,000 60,000 Project B Cash Flow ($) -120,000 15,000 25,000 42,000 61,000 50,000 .... and because.... …….... and ……... .%. .%.
Required information [The following information applies to the questions displayed below.] The following capital expenditure projects have been proposed for management's consideration at Scott Inc. for the upcoming budget year: Use Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) Project Year(s) B D $ (25,000) $(50,000) 16,000 16,000 16,000 16,000 16,000 $ (50,000) 5,000 10,000 15,000 20,000 25,000 Initial investment $(25,000) 5,000 5,000 5,000 5,000 5,000 5,000 $ 1,081 $(100,000) 30,000 30,000 Amount of net cash return 1 2 3. 10,000 10,000 10,000 6,000 15,000 15,000 15,000 15,000 2,942 4 5 Per year 6-10 NPV (14% discount rate) 2$ $ Present value ratio 1.04 Required: a. Calculate the net present value of projects indicated by a minus sign.) and D, using as the cost of capital for Scott Inc. (Negative amounts should be Project Net Present Value B D
OPPfel Hospitality Consulting Inc. has two similar financial projects to offer one of its corporate clients in the hospitality industry. OPPfel wants to evaluate a set of capital budgeting projects and come up with the best decision according to the project’s IRR and PI for the client. NINV and NCF data for both of the projects are shown in the data table below: Year Project AR Project BF 0 -$100,000 -$100,000 1 $70,000 $20,000 2 $60,000 $50,000 3 $20,000 $100,000 If the minimum required rate of return is 10.00% for both of the capital budgeting projects, which one of the projects provides a better investment decision that OPPfel can consult to the its client?
Five engineering projects are being considered for the upcoming capital budget period. The interrelationships among the projects and the estimated net cash flows of the projects are summarized in the following table: Projects B1 and B2 are mutually exclusive. Projects C1 and C2 are mutually exclusive and dependent on the acceptance of B2. Finally, project D is dependent on the acceptance of C1. Using the PW method, and assuming that MARR = 10% per year, determine which combination (portfolio) of projects is best if the availability of capital is limited to $48,000.

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