Revenues generated by a new fad product are forecast as follows:Year1234ThereafterRevenues$ 40,00030,00020,0005,0000Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in thefollowing year. The product requires an immediate investment of $49,000 in plant and equipment.Required:a. What is the initial investment in the product? Remember working capital.b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm'stax rate is 20%, what are the project cash flows in each year?c. If the opportunity cost of capital is 10%, what is project NPV?d. What is project IRR?

Capital budgeting is a process that businesses use to evaluate and select long-term investment…

Required: a. What is the initial investment in the product? Remember working capital. b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 20%, what are the project cash flows in each year? c. If the opportunity cost of capital is 10%, what is project NPV? d. What is project IRR?

Required: a. What is the initial investment in the product? Remember working capital. b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 20%, what are the project cash flows in each year? c. If the opportunity cost of capital is 10%, what is project NPV? d. What is project IRR?

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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Q1) What is the Free Cash Flow at the end of the year 2? Q2) How much is the capital gain/loss at the end of the project? Q3) What is the amount of Working capital recovered at the end of the project?
A project will cost $30 in year 1 and generate earnings before interest, taxes and depreciation of $20 in year 1, $15 in year 2 and $10 in year 3. The inital cost is to be linearly depreciated over three years. The company has a marginal corporate income tax rate of 21% and the appropriate unlevered cost of capital for the project is 12%. a: What is the NPV of the project if the firm is all equity-financed? b: What is the APV of the project if the firm uses $30 debt finance in the first year at an expected rate of return of 5%? The company will pay interest in years 2 and 3 and pay off the loan in year 3
Explain how did it get the after-tax cash flow, NPV, EVA, and MVA
Given the initial investment in a factory processing equipment as Ghc500,037. Let the opportunity cost of capital for the industry be 10% p.a. Assuming that the equipment is capable of generating an after-tax returns of Ghc115,000 for the first 5 years and Ghc65000 for the 6 year and Ghe53400 for the 7th year. a. Find the Net Present Value (NPV) b. Detemine the Internal Rate of Return c. Identify three ways in which the Net Present value is superior to the Internal Rate of return as investment criteria
If you invested $180 million into a project today, and achieved operating cash flows of $50million, $30million, $40million, $80million, and $30million, how would you measure the following: a. NPV (assuming 7.8% cost of capital) b. IRR c. How would you mathematically and verbally describe NPV relative to the IRR?
Q1) What is the Cash Flow from Operation at the end of the Year 1
3.) A project is estimated to cost $350,000, last 9 years, and have a salvage value of $90,000. The annual gross income is expected to average $54,000 and annual expenses excluding depreciation is $8,000. If capital is earning 15% before income taxes, determine if this is desirable investment using both PW and AW.
Solve the following problems. Provide proper solutions. 1. Given the information below and 15 percent cost of capital: OUTFLOW Year1: P800,000 Year2: P800,000 Year3: P800,000 Year4: P800,000 Year5: P800,000 P2,500,000 INFLOWS (a) Compute the net present value. (b) Should the project be accepted? Why? -----
e. Estimate the required net operating working capital (NOWC) for each year and the cash flow due to changes in NOWC. f. Calculate the after-tax salvage cash flow. g. Calculate the project cash flows for each year. Based on these cash flows and the average project cost of capital, what are the project’s NPV, IRR, MIRR, PI, payback, and discounted payback? Do these indicators suggest that the project should be undertaken?
howell petroleum, incorporatred, is trying to evaluate a generation project with the following cash flows: year 0 -39,300,000 year 1 63,300,000 year 2 -12,300,000 What is the NPV for the project if hte company requires a return of 12 percent? this project has two irr what are they
Refer to the following information. Which of the two projects, A or B, is better in terms of internal rate of return? Kenner Company is considering two projects. Project A $85,000 $20,676 Initial investment Annual cash flows Life of the project Depreciation per year 2 3 4 5 6 7 8 9 10 6 years $14,167 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 Present value of an Annuity of $1 in Arrears Periods 8% 12% 1 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 Project B $24,000 $6,011 10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 5 years $4,800 14% 0.877 1.647 2.322 2.914 4.433 3.889 4.288 4.639 4.946 5.216
Part B: Solve the following excersises: 1. A company is considering two mutually exclusive projects X and Y. Each require an initial investment of OMR 100,000.The after tax cash inflows associated with each project are as follows: Year Project X Cash flows Project Y Cash flows (Initial Investment) 120,000 120,000 25,000 20,000 2 ? ? 3 ? ? ? ? 5 ? ? (a) Complete the table where Payback period for Project X is 3.5 and for project Y is 4. (b) Which project is better?

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