Suppose that a project has an immediate cost of$10 million and running costs of $1 million per yearbeginning at the end of a one-year constructionperiod. At the end of this year, annual grossrevenue from the project of $1.5 million per year isgenerated in perpetuity. (You may assume that therunning costs and revenues accrue at the end ofeach year.)(a) Is the project profitable in a net present-valuesense if the interest rate is 8%?(b) For what range of interest rates (nonnegative) isthe present value of net revenues (including theimmediate cost of $10 million) positive?

A. NPV = Cash inflow- Cash outflow Cash outflow= $ 10 million Cash inflow= Net profit/ interest rate…

Answered: Suppose that a project has an immediate…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Compute the payback statistic for Project A if the appropriate cost of capital is 7 percent and the maximum allowable payback period is four years. (Round your answer to 2 decimal places.) Project A Time: 0 1 2 3 4 5 Cash flow: −$1,400 $510 $600 $600 $380 $180 Payback years: _______.__
Calculate Internal Rate of Return to the investor based on a sale of the project at 12/31/26 using a 6.75% Cap Rate as sale value and 2% closing costs. Assume minimum $10,000 working capital at end of every year. All other cash flow is Distributable to investor.
A project is expected to cost $4 million today and generate a net after-tax cash flow of $600,000 at the end of year 1 and $500,000 at the end of year 2. The net cash flows from year 2 onwards are expected to grow at 6% per annum forever. If the project’s discount rate is 12%, calculate the net present value of the project. Show all calculations.
Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $11,500 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,900 and $7,700 at the end of Years 1 and 2, respectively. In addition, Project X can be repeated at the end of Year 2 with no changes in its cash flows. Project Y has an expected life of 4 years with after-tax cash inflows of $4,400 at the end of each of the next 4 years. Each project has a WACC of 8%. Using the replacement chain approach, what is the NPV of the most profitable project? Do not round the intermediate calculations and round the final answer to the nearest whole number. a. $3,399 b. $3,925 c. $3,073 d. $2,768 e. $3,620
What is the NPV for the following project if its cost of capital is 10 percent and its initial after tax cost is $5,000 and it is expected to provide after-tax operating cash inflows of $1,800 in year 1, $1,900 in year 2, $1,700 in year 3 and $1,300 in year 4?
Determine the average rate of return for a project that is estimated to yield total income of $269,760 over four years, cost $511,000, and has a $51,000 residual value. fill in the blank %
A certain project requires a $1 million initial investment, and will yield incremental after-tax cash flows of $225,000 per year for 5 years. What is the IRR of the project, stated as an APR compounded annually?
Determine the average rate of return for a project that is estimated to yield total income of $220,800 over 4 years, cost $419,000, and has a $41,000 residual value.
A project requires a $1 million initial investment, and will yield incremental after-tax cash flows of $300,000 per year for 5 years. What is the IRR of the project, stated as an APR compounded annually?
Determine the average rate of return for a project that is estimated to yield total income of $484,440 over 4 years, costs $668,000, and has a $66,000 residual value.
A project requires an increase of $2100 in Net Working Capital at the beginning of the project, which will be fully recovered after the completion of the project. Equipment with a book value of $11,000 will be sold at the end of the project for a salvage value of $6,000. The tax rate is 20%. What is the incremental free cash flow in the year following the end of the project? Question 3Answer a. $9100 b. $7100 c. $4900 d. $2900
Project A would cost $44,383.00 today and have the following other expected cash flows: $27,842.00 in 1 year, $18,921.00 in 2 years, $4,722.00 in 3 years, and $3,185.00 in 4 years. The cost of capital for project A is 11.88 percent. Project B would cost $97,631.00 today and have the following other expected cash flows: $55,937.00 in 1 year, $24,612.00 in 2 years, $27,364.00 in 3 years, and $2,415.00 in 4 years. The cost of capital for project B is 7.73 percent Statement 1: Project A would be accepted based on the project's internal rate of return (IRR) and the IRR rule Statement 2: Project B would be accepted based on the project's payback period and the payback rule if the payback threshold is 2.90 years Statement 1 is true and statement 2 is true Statement 1 is true and statement 2 is false Statement 1 is false and statement 2 is true Statement 1 is false and statement 2 is false

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