Revenues generated by a new fad product are forecast as follows: Year Revenues 1$ 45,000 2 40,000 3 30, 000 4 20,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 30% of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment. Required: What is the initial investment in the product? Remember working capital. 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 40%, what are the project cash flows in each year? If the opportunity cost of capital is 15%, what is project NPV? What is project IRR?

Revenues generated by a new fad product are forecast as follows: Year Revenues 1$ 45,000 2 40,000 3 30, 000 4 20,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 30% of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment. Required: What is the initial investment in the product? Remember working capital. 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 40%, what are the project cash flows in each year? If the opportunity cost of capital is 15%, what is project NPV? 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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4. Your company is considering the introduction of a new product line. The initial investment required for this project is $500,000, and annual maintenance costs are anticipated to be $35,000. Annual operating costs will be directly proportional to the level of production at $7.50 per unit, and each unit of product can be sold for $50. If the MARR is 15% and the project has a life of 5 years, what is the minimum annual production level for which the project is economically viable?
As a project manager, you need to update the status of your current project to the management. You have been allocated a capital budgeting to managing a larger-scale decisions by firm. Assume that a firm considers opening up a new store, which would require an initial investment outlay of RM60,000 as stated in the table 1 below. Table 1 End of Year Net Flow Revenue (RM) (60,000) 15,000 15,000 15,000 15,000 15,000 0 1 2 3 4 5 Discount 1.0000 į iv V GRAND TOTAL NPV (RM) (60,000) vi Vii Viji X 8,901.77 Xi Should you invest $60,000 in a project that will return $15,000 per year for five years? You have a minimum return of 8% and expect inflation to hold steady at 3% over the next five years. Determine the Net Present Value (NPV) for this project and proposed your recommendation to management regarding on this proposed project.
Use the format in the figure below to perform a financial analysis. Create a spreadsheet to perform the analysis and show the NPV, ROI, and year in which payback occurs. + Perform a financial analysis for a project using the format provided in Figure 4-5. Assume that the projected costs and benefits for this project are spread over four years as fol- lows: Estimated costs are $200,000 in Year 1 and $30,000 each year in Years 2, 3, and 4. Estimated benefits are $0 in Year 1 and $100,000 each year in Years 2, 3, and 4. Use a 9 percent discount rate, and round the discount factors to two decimal places. Create a spreadsheet or use the business case financials template on the companion website to cal- culate and clearly display the NPV, ROI, and year in which payback occurs. In addition, write a paragraph explaining whether you would recommend investing in this project, based on your financial analysis. Discount rate 8% Assume the project is completed in Year 0 0 Costs Discount factor…
You are responsible to manage an IS project with a 4-year horizon. The annal cost of the project is estimated at $40,000 per year, and a one-time costs of $120,000. The annual monetary benefit of the project is estimated at $96,000 per year with a discount rate of 6 percent. a. Calculate the overall return on investment (ROI) of the project. b. Perform a break-even analysis (BEA). At what year does break-even occur?
What is the NPV of a project that costs $38,000 today and is expected to generate annual cash inflows of $9,000 for the next 7 years, followed by a final inflow of $15,000 in year 8. Cost of capital is 7.4%. Round to the nearest cent.
Use the LCOE Levelized Cost of Energy to calculate the following: An offshore 1 MW wind turbine costs $2,000 per kW to construct. It produces 4,000 MWh of electricity each year. The cost of capital is 20% (high-risk project). Operations cost is $10 per MWh (a lot of maintenance due to salt and wear-and-tear from ocean). Project lifetime is 10 years. A) If a nuclear plant has a levelized cost of $100/MWh, which do you recommend constructing? B) Which do you recommend if the government offers a program that pays 30% of construction costs? Include your spreadsheet if you use Excel or provide enough information for me to understand how you did your calculations if you do not use a spreadsheet.
Give typing answer with explanation and conclusion What is the change in the NPV of a one-year project if fixed costs are increased from $400 to $600, assuming the firm is profitable, has a 21% tax rate, and a 12% cost of capital.
Revenues generated by a new fad product are forecast as follows: Year Revenues $45,000 1 2 35,000 3 25,000 4 20,000 Thereafter 0 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $60,000 in plant and equipment.
A new machine will cost $400,000 and generate after-tax cash inflows of $50,000 for 12 years. Find the NPV if the firm uses a 11% opportunity cost of capital. What is the IRR? What is the payback period? (5’)
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…
Company XYZ has developed the concept of a new product, from preliminary budgetary estimate to final design ready for implementation. The development has required an initial investment at the beginning of the activity, which lasted six months before implementation and beginning of production. At completion of implementation and beginning of production the CEO wants to estimate the expected PV of the investment, he/she has the following data: • Capital for development P1 = $30,000 Development period 0.5 years Capital for Implementation P2 = $2,000,000 %3D Anticipated sales revenues $20,000 Ar = $250,000/yr plus Gr = Anticipated 0&M cost $2,000 A om= $25,000/yr plus G om = Project Life 15 years Salvage Value F = 20% of invested capital %3D • Worth of Capital availability for the Company i= 7.35% QUESTIONS: 1) Draw the Cash Flow Diagram of this investment. 2) Write the expression for deriving PV using generic i and n. Assume the beginning of production as the reference period.
Your company is currently considering two investment projects. Each project requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and the investments will produce the after tax cash flows on the attached image . a)Calculate the payback period for both projects,then compare to identify which project the firm should undertake. b)Evaluate the advantages and disadvantages of using the payback method in investment decisions and assess the situations where it should be used .

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