Engineering Economy (17th Edition)
17th Edition
ISBN: 9780134870069
Author: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher: PEARSON
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Chapter 13, Problem 4P
To determine
The expected return for the investment
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You are considering opening a new plant. The plant will cost $101.3 million up front and will take one year to build. After that it is expected to produce profits of $30.5 million at the end
of every year of production. The cash flows are expected to last forever. Calculate the NPV of this investment opportunity if your cost of capital is 8.6%. Should you make
the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.
The NPV of the project will be $ 225.3 million. (Round to one decimal place.)
You should
make the investment. (Select from the drop-down menu.)
The IRR is
%. (Round to two decimal places.)
23
N=7
You have been asked to forecast the additional funds needed (AFN) for a firm, which is planning its operation for the coming year. The firm is operating at full capacity. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm's investment bankers have recommended. Based on the AFN equation, by how much would the AFN for the coming year change if the firm increased the payout from 10% to the new and higher level? All euros are in millions.
Last year's sales = S0
€300.0
Last year's accounts payable
€50.0
Sales growth rate = g
40%
Last year's notes payable
€15.0
Last year's total assets = A0*
€500.0
Last year's accruals
€20.0
Last year's profit margin = PM
20.0%
Initial payout ratio
10.0%
AFN = (A0*/S0)DS - (L0*/S0)DS - Profit margin ´ S1 ´ (1 -Payout)
Chapter 13 Solutions
Engineering Economy (17th Edition)
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