Two competing project proposals, 1 and 2, are currently under consideration for the manufacture of a new product line. Information for each of the projects is as follows, with cash flows stated in nominal terms: Project Estimated life 1 2 5 years 3 years $200 000 Initial outlay $600 000 Annual after-tax cash flows $175 000 $245 000 1.1 Assume that projects 1 and 2 are of average risk to the firm, and the firm's cost of capital is 5.5% p.a., stated in real terms. If inflation is expected to be 4.25% p.a. for each of the next five years, calculate the net present value of each project. Round your answer off to the nearest dollar. 1.2 Which of the two projects you will select to implement? Motivate your answer.

Two competing project proposals, 1 and 2, are currently under consideration for the manufacture of a new product line. Information for each of the projects is as follows, with cash flows stated in nominal terms: Project Estimated life 1 2 5 years 3 years $200 000 Initial outlay $600 000 Annual after-tax cash flows $175 000 $245 000 1.1 Assume that projects 1 and 2 are of average risk to the firm, and the firm's cost of capital is 5.5% p.a., stated in real terms. If inflation is expected to be 4.25% p.a. for each of the next five years, calculate the net present value of each project. Round your answer off to the nearest dollar. 1.2 Which of the two projects you will select to implement? Motivate your answer.

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

See similar textbooks

Similar questions

M& B is considering investing in Project X which requires an initial investment of P15,000. The firm`s cost of capital is 9%. The project is expected to last for six years and provide an annual cash flow of P3,000. What is this projects breakeven cash flow? A. P3,434.00 B. P3,334.00 C. P3,344.00
Wonder Plc is considering two investment projects in another city and the estimated cash flows are as follows: Year Hotels$(m) Housing $(m) 0 Capital outlay (200) (250) Net cash flows 1 130 130 2 60 120 3 80 120 4 100 80 4 Residual value 20 40 The company’s cost of capital is 15%. (a) Assess the viability of these two projects using NPV and Payback period as the appraisal techniques and advise Wonder Plc’s Board of Directors accordingly. (b) Explain the importance of Payback period to the CEO.
Suppose Acme Manufacturing Corporation's CFO is evaluating a project with the following cash inflows. She does not know the project's initial cost; however, she does know that the project's regular payback period is 2.5 years. Year Year 1 Year 2 Year 3 Year 4 Cash Flow $350,000 $500,000 $450,000 $475,000 If the project's weighted average cost of capital (WACC) is 7%, what is its NPV? O $334,825 $418,531 O $355,751 $397,604
M/s Sons & Sons is considering two projects, A & B, with cash flows as shown below: period Cash Flow of Project A Project B 0 -90,000 -150,000 1 30,000 72,000 2 30,000 35,000 3 30,000 40,000 4 30,000 25,000 Calculate discounted payback period, net present value and internal rate of return for each project using opportunity cost of capital 13 % & 9% for project A & B respectively. Which project(s) should be accepted if : (i) The projects are mutually exclusive and there is no capital constraint. (ii) The projects are independent and there is no capital constraint. (iii) The projects are independent and there is a total of $100,000 of financing for capital outlays in the coming period. Why the cost of capital for A might be higher than for B. State possible reason(s) (show the calculations & formula on word/excel)
Shaylee Corp has $2.10 million to invest in new projects. The company’s managers have presented a number of possible options that the board must prioritize. Information about the projects follows: Project A Project B Project C Project D Initial investment $ 720,000 $ 400,000 $ 960,000 $ 1,115,000 Present value of future cash flows 935,000 500,000 1,650,000 1,310,000 Required:1. Is Shaylee able to invest in all of these projects simultaneously?multiple choice No Yes 2-a. Calculate the profitability index for each project. (Round your answers to 4 decimal places.)
A company is considering a 10-year capital investment project. The project has annual positive cash flows each year. The accounting manager has calculated the NPV of the same project using three different costs of capital (8%, 10% and 18 %) as discount rates. Select the most logical combination of NPVS from the choices given. Note: You cannot calculate the NPVS nor do you need to. O $(5,743) $3,152 $6,612 O $(5,743) $6,612 $3,152 $3,152 $6,512 $(5,743) O $6,512 $3,152 $(5,743) O None of the above
A company is considering a 4-year project with the following cash flows: C0 =-$20,000 C1 =C2 =C3 =C4 =$7,000 If the company’s opportunity cost of capital is 12%, then compute the following for the project: a) the project’s NPV b) the project’s IRR c) determine if the project will have more than 1 IRR d) The project’s PI e) Should the project be rejected because its payback period is longer than two years? f) Should the project be rejected because its IRR is greater than its required rate of return?
JVA corporation is considering investing in a new project with the estimated cash flows shown below. Compute the NPV for the project and recommend whether the firm should accept or reject it. The required cost of capital is 20 percent. Time Cash Flow 0 1 -100 20 -$13.55, reject O$10.26, reject O $1.90, accept. O $11.34, reject 2 52 3 62
CII, Incorporated, Invests $700,000 in a project expected to earn a 9% annual rate of return. The earnings will be reinvested in the project each year until the entire Investment is liquidated 11 years later. What will the cash proceeds be when the project is liquidated? (PV of $1. FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Round your "FV of a single amount" to 4 decimal places and final answer to the nearest whole dollar.) Present Value f (FV of a Single Amount) Future Value
Walmart is considering two mutually exclusive projects. The firm, which has a 12% cost of capital, has estimated its cash flows as shown in the following table. a) Calculate the NPV of each project, and assess its acceptability. b). Calculate the IRR for each project, and assess its acceptability.
Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm’s cost of capital, r, is 10%, and the risk-free rate, RF, is 2%. The firm has estimated each project’s cash flow and each project’s beta, as shown in the following table. Project (j) E F G Initial investment (CF0) -$15,000 -$11,000 -$19,000 Year (t) Cash inflows (CFt) 1 $6,000 $6,000 $ 4,000 2 6,000 4,000 6,000 3 6,000 5,000 8,000 4 6,000 2,000 12,000 Beta 1.80 1.00 0.60 a. Find the NPV of each project, using the firm’s cost of capital. Which project is preferred in this situation? b. The firm uses the following equation to determine the risk-adjusted discount rate, RADRj, for each project j: RADRj = RF + Bj x (rm -RF) Where RF = risk-free rate 2% Bj = beta of project j RADRj = risk-adjusted discount rate for project j rm = expected return on market portfolio 10% Substitute each project’s beta into this equation to determine its RADR. c. Use the RADR for each project to…
Bates & Reid, LLC, has identified two mutually exclusive projects, A and B. Project A has a NPV of $14,050.47. Project B has cash flows as described below. Year Cash Flow B 0 -$77,000 1 35,000 2 25,000 3 25,000 4 25,000 If the WACC is 8%, then B’s NPV is _______ and therefore the firm should accept _________ $11,337.55; project B because NPVA > NPVB. $15,062.43; project B because NPVA < NPVB. $15,062.43; project A because NPVA < NPVB. The projects are equally profitable. $11,337.55; project A because NPVA > NPVB.

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS