(Available points=100pts) *You are not allowed to do this assignment with other people. *You are not allowed to discuss this assignment with other people.
*Show all of your work for any possible partial credit. *All necessary calculations should be done on this excel file to show how to get your outputs. Then, I can figure out the w process as to how your answers were obtained. Therefore, simply showing numbers as a result does not earn any point.
* Be sure to answer exactly what is asked in the problems. *Save your work file in the following format of the file name: M03_Assignment_Last Name_First Name.xls (x). Any submi
accepted. *Absolutely….”One File Policy!!!” You have to pack all your answers into this excel file. If you need a word document to incorporate MS word document into this excel file. Follow these operations to import MS document into the excel file: Insert “Word Document” from the drop-down list. *???Rules for Rounding off Numerical Values???
While working on your calculations, i) Round the number in percentage upto the second decimal place (e.g., 2.3567..% 2.36%)
ii) Round the dollar values upto the second decimal place if they are not whole numbers. I
II III 1)
2)
1)
2)
3)
4) Points
6
6
6
6
6
6
8 IV V TOTAL 1)
2)
3)
4)
Design A
Design B Points
8
8
8
8
12
12 100 hen, I can figure out the whole s not earn any point. ame.xls (x). Any submission through the email will not be eed a word document to write your answer down, please into the excel file: Insert (from menu bar)>Object…>choose 1) What are three potential flaws with the regular payback method? Does the discounted payback method correct all three flaws? Explain. ANS:The regular payback method has three main flaws, dollars received in different years are all given the same weight, cashflows beyond the payback yearare given no consideration regardless of how large they may be, and lastly,unlike the NPV which shows us how much the project would increase theshareholder wealth or the IRR which would tell us how much a projectwould yield over the cost of capital, the payback method only tells us whenthe company would be receiving the investment back. It corrects the First flaw however, it does nothing to correct the other two flaws. 2) Project X is very risky and has an NPV of $3 million. Project Y is very safe and has an NPY of $2.5 million. They are mutually exclusive, and project risk has been properly considered in the NPV analyses. Which project should be chosen? Explain.
ANS:Answer on the basis of npv analysis project X shall be considered because of higher npv since it is more risky
its risk have been considered in discount factor where there is risk there is a reward . ck method e all given the same they may be, and ealth or the IRR which y tells us whenthe othing to correct the of $2.5 million. . Which project since it is more risky 1) What are the payback periods of the two projects? You have to show how to get your answer.
Payback Period A 2.67 Payback Period B 1.5 2) If the projects are independent (non-mutually exclusive) and the cost of capital is 10 percent, which project (s) should the firm undertake? Answer this question with NPV and IRR of those two projects. You have to show how to get your answer. NPV_A
NPV_B
IRR_A
IRR_B 12739.91
11554.88
27.27%
36.15% Which Project (s)? Project A 3) If the projects are mutually exclusive and the cost of capital is 16 percent, which project should the firm undertake if the firm adopts only NPV method? Answer this question with NPV of those two projects. You have to show how to get your answer. NPV_A
NPV_B 7397.66
8112.02 Which Project (s)? Project B Make sure to create cash flows in the templages below as needed. Hint: Since the company needs the computer system for
would need to consider the cash flows for only six years. Check Slid page 25, M06L02 Lecture Notes, CapitalBudgeting.xls year
System A NPV
System B 0
-100000 2
60000 3
-40000 4
60000 5
60000 6
-40000 48000 48000 48000 -47200 52800 52800 27,249.05
-100000 NPV 1
60000 45,769.47 eeds the computer system for only 6 years you
Notes, CapitalBudgeting.xls Greater Findlay Company (GFC) is contemplating four projects, Project P, Project Q, Project R, and Project S. The capital cos
listed below. GFC’s desired after-tax opportunity cost (WACC) is 12%, and the company has a capital budget for the year of $ Initial Capital Outlay
Annual Net Cash Flows
Year 1
Year 2
Year 3
Year 4
Year 5
NPV
IRR
PI P
(200,000) Q
(235,000) R
(190,000) S
(210,000) 93,000
93,000
93,000
$23,370.31
18.69%
1.40 90,000
85,000
75,000
55,000
50,000
$29,826.98
17.62%
1.51 45,000
55,000
65,000
70,000
75,000
$27,333.23
17.16%
1.63 40,000
50,000
60,000
65,000
75,000
($7,853.52)
10.63%
1.38 1). Calculate NPV, PI, and IRR of all business projects. (fill the grey colored cells in the table above). 2). Which project(s) should GFC undertake ? Make sure to juastify your answer to earn points 3). Which project (s) should GFC undertake during the upcoming year assuming it has no budget restrcitions? Mak
Projects P,Q,R all should be undertaken due to their high npv’s and IRR. 4). If GFC is able to accept only one project, which project GFC would choose?Make sure to juastify your answer
Project Q has the highest NPV and therefor should be chosen over the other projects. and Project S. The capital costs and estimated after-tax cash flows of each mutually exclusive project are capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12%. table above). points no budget restrcitions? Make sure to juastify your answer to earn points sure to juastify your answer to earn points. Calculation of Net cash flows from adopting new project (Design A)-Expansion Project year 0 Step A: Estimating Initial Cash Outflow
– Cost of "new" asset
– Capitalized expenditures(shipping&installation)
+ Net proceeds from sale of "old"asset (current system)
-(+) Taxes(Tax savings, tax rate=34%)due to sale of "old" asset (current system)
= Initial Cash Outflow
Step B: Calculating Interim Incremental Net Cash Flows (years 1 to 5)
a) Operating costs from present equipment (excluding taxes and depreciation)
b) Operating costs if Design A is invested (excluding taxes and depreciation)
D EBIT_other than D Depreciation : a)-b)
D Depreciation
D Net Working Capital (NWC)
D Capital Expenditure
Interim Incremental Net Cash Flow
Step C: Calculating Terminal-year Incremental Net Cash Flow
Incremental cash flow from the terminal year before project windup considerations
+ Final salvage value of "new" asset (Design A)
– Tax due to sale or disposal of "new" asset (tax effect of capital gain or loss)
= Terminal-year Incremental Net Cash Flow End of
0 Incremental Net cash flows
NPV
MACRS depreciation rate for three-year property class
Net Increase in tax depreciation chareges
New Design’s depreciation basis
ScholarMatic: Explanation & Answer
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