Business Finance I-FIN 315:<\/p>\n
Homework Assignment:<\/p>\n
1. Long-term investment\u200b\u00a0decision, payback method Personal Finance Problem. Bill Williams has the opportunity to invest in project A that costs $5,900 today and promises to pay $2,100\u200b, $2,400\u200b, $2,400\u200b, $2,000 and $1,800 over the next 5 years. \u200b\u00a0Or, Bill can invest $5,900 in project B that promises to pay $1,400\u200b, $1,400\u200b, $1,400\u200b, $3,600 and $4,100 over the next 5 years. (\u200bHint: For mixed stream cash\u200b\u00a0inflows, calculate cumulative cash inflows on a\u200b\u00a0year-to-year basis until the initial investment is recovered.\u200b)<\/p>\n
a.\u2003\u2003How long will it take for Bill to recoup his initial investment in project\u200b\u00a0A?<\/p>\n
b.\u2003\u2003How long will it take for Bill to recoup his initial investment in project\u200b\u00a0B?<\/p>\n
c.\u2003\u2003Using the payback\u200b\u00a0period, which project should Bill\u200b\u00a0choose? <\/p>\n
d.\u2003\u2003Do you see any problems with his\u200b\u00a0choice?<\/p>\n
2. Net present value\u2003\u2003\u2003Using a cost of capital of 15\u200b%, calculate the net present value for the project shown in the following table and indicate whether it is\u200b\u00a0acceptable,<\/p>\n
Initial investment <\/p>\n
\u200b(CF0\u200b)<\/p>\n
\u22121,160,000<\/p>\n
Year <\/p>\n
\u200b(t\u200b)<\/p>\n
Cash inflows <\/p>\n
\u200b(CFt\u200b) <\/p>\n
1<\/p>\n
\u200b$83,000<\/p>\n
2<\/p>\n
\u200b$133,000<\/p>\n
3<\/p>\n
\u200b$187,000<\/p>\n
4<\/p>\n
\u200b$256,000<\/p>\n
5<\/p>\n
\u200b$314,000<\/p>\n
6<\/p>\n
\u200b$381,000<\/p>\n
7<\/p>\n
\u200b$273,000<\/p>\n
8<\/p>\n
\u200b$98,000<\/p>\n
9<\/p>\n
\u200b$47,000<\/p>\n
10<\/p>\n
\u200b$29,000<\/p>\n
3. NPV\u2014Mutually exclusive projects. Hook Industries is considering the replacement of one of its old metal stamping machines. Three alternative replacement machines are under consideration. The relevant cash flows associated with each are shown in the following\u200b\u00a0table: <\/p>\n
The\u200b\u00a0firm’s cost of capital is 8\u200b%.<\/p>\n
Machine A<\/p>\n
Machine B<\/p>\n
Machine C<\/p>\n
Initial investment <\/p>\n
\u200b(CF0\u200b)<\/p>\n
\u200b$84,900<\/p>\n
\u200b$59,700<\/p>\n
\u200b$129,600<\/p>\n
Year\u200b\u00a0(t)<\/p>\n
Cash inflows <\/p>\n
\u200b(CFt\u200b)<\/p>\n
1<\/p>\n
\u200b$18,100<\/p>\n
\u200b$11,900<\/p>\n
\u200b$50,500<\/p>\n
2<\/p>\n
\u200b$18,100<\/p>\n
\u200b$14,300<\/p>\n
\u200b$30,200<\/p>\n
3<\/p>\n
\u200b$18,100<\/p>\n
\u200b$15,700<\/p>\n
\u200b$19,900<\/p>\n
4<\/p>\n
\u200b$18,100<\/p>\n
\u200b$18,200<\/p>\n
\u200b$20,400<\/p>\n
5<\/p>\n
\u200b$18,100<\/p>\n
\u200b$19,600<\/p>\n
\u200b$20,300<\/p>\n
6<\/p>\n
\u200b$18,100<\/p>\n
\u200b$24,900<\/p>\n
\u200b$30,300<\/p>\n
7<\/p>\n
\u200b$18,100<\/p>\n
\u2014<\/p>\n
\u200b$40,000<\/p>\n
8<\/p>\n
\u200b$18,100<\/p>\n
\u2014<\/p>\n
\u200b$49,500<\/p>\n
a.\u2003\u2003Calculate the net present value (NPV\u200b) of each press.<\/p>\n
b.\u2003\u2003Using\u200b\u00a0NPV, evaluate the acceptability of each press.<\/p>\n
c.\u2003\u2003Rank the presses from best to worst using NPV.<\/p>\n
d.\u2003\u2003Calculate the profitability index\u200b\u00a0(PI) for each press.<\/p>\n
e.\u2003\u2003Rank the presses from best to worst using PI.<\/p>\n
4. IRR\u2014Mutually exclusive projects\u2003\u2003\u2003Bell Manufacturing is attempting to choose the better of two mutually exclusive projects for expanding the\u200b\u00a0firm’s warehouse capacity. The relevant cash flows for the projects are shown in the following\u200b\u00a0table: The\u200b\u00a0firm’s cost of capital is 15\u200b%.<\/p>\n
Project X<\/p>\n
Project Y<\/p>\n
Initial investment <\/p>\n
\u200b(CF0\u200b)<\/p>\n
\u200b$500,000<\/p>\n
\u200b$350,000<\/p>\n
Year <\/p>\n
\u200b(t\u200b)<\/p>\n
Cash inflows <\/p>\n
\u200b(CFt\u200b)<\/p>\n
1<\/p>\n
\u200b$100,000<\/p>\n
\u200b$150,000<\/p>\n
2<\/p>\n
\u200b$130,000<\/p>\n
\u200b$110,000<\/p>\n
3<\/p>\n
\u200b$160,000<\/p>\n
\u200b$115,000<\/p>\n
4<\/p>\n
\u200b$180,000<\/p>\n
\u200b$60,000<\/p>\n
5<\/p>\n
\u200b$250,000<\/p>\n
\u200b$70,000<\/p>\n
a.\u2003\u2003Calculate the IRR for each of the projects. Assess the acceptability of each project on the basis of the IRRs.<\/p>\n
5. NPV and IRR\u2003\u2003\u2003Benson Designs has prepared the following estimates for a\u200b\u00a0long-term project it is considering. The initial investment is $13,820\u200b, and the project is expected to yield\u200b\u00a0after-tax cash inflows of $3,000 per year for 7 years. The firm has a cost of capital of 9\u200b%.<\/p>\n
a.\u2003\u2003Determine the net present value\u200b\u00a0(NPV) for the project.<\/p>\n
b.\u2003\u2003Determine the internal rate of return\u200b\u00a0(IRR) for the project.<\/p>\n
6. \u200bPayback, NPV, and IRR\u2003\u2003\u2003Rieger International is evaluating the feasibility of investing $89,000 in a piece of equipment that has a 5\u200b-year life. The firm has estimated the cash inflows associated with the proposal as shown in the following\u200b\u00a0table. The firm has a 9\u200b% cost of capital.<\/p>\n
Year <\/p>\n
\u200b(t\u200b)<\/p>\n
Cash inflows\u200b\u00a0(CF)<\/p>\n
1<\/p>\n
\u200b$25,000<\/p>\n
2<\/p>\n
\u200b$20,000<\/p>\n
3<\/p>\n
\u200b$30,000<\/p>\n
4<\/p>\n
\u200b$30,000<\/p>\n
5<\/p>\n
\u200b$40,000<\/p>\n
a.\u2003\u2003Calculate the payback period for the proposed investment.<\/p>\n
b.\u2003\u2003Calculate the net present value\u200b\u00a0(NPV) for the proposed investment.<\/p>\n
c.\u2003\u2003Calculate the internal rate of return (IRR)\u200b, rounded to the nearest whole\u200b\u00a0percent, for the proposed investment.<\/p>\n
d.\u2003\u2003Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the\u200b\u00a0project?<\/p>\n
7. Integrative\u2014Conflicting Rankings\u2003\u2003\u2003The\u200b\u00a0High-Flying Growth Company\u200b\u00a0(HFGC) has been expanding very rapidly in recent\u200b\u00a0years, making its shareholders rich in the process. The average annual rate of return on the stock in the past few years has been 18\u200b%, and HFGC managers believe that 18\u200b% is a reasonable figure for the\u200b\u00a0firm’s cost of capital. To sustain a high growth\u200b\u00a0rate, HFGC’s CEO argues that the company must continue to invest in projects that offer the highest rate of return possible. Two projects are currently under review. The first is an expansion of the\u200b\u00a0firm’s production\u200b\u00a0capacity, and the second project involves introducing one of the\u200b\u00a0firm’s existing products into a new market. Cash flows from each project appear in the following\u200b\u00a0table: <\/p>\n
Year<\/p>\n
Plant expansion<\/p>\n
Product introduction<\/p>\n
0<\/p>\n
\u2212\u200b$3,400,000<\/p>\n
\u2212\u200b$600,000<\/p>\n
1<\/p>\n
\u200b$2,000,000<\/p>\n
\u200b$375,000<\/p>\n
2<\/p>\n
\u200b$2,000,000<\/p>\n
\u200b$400,000<\/p>\n
3<\/p>\n
\u200b$2,250,000<\/p>\n
\u200b$350,000<\/p>\n
4<\/p>\n
\u200b$1,500,000<\/p>\n
\u200b$375,000<\/p>\n
a.\u2003\u2003Calculate the NPV for both projects. Rank the projects based on their NPVs.<\/p>\n
b.\u2003\u2003Calculate the IRR for both projects. Rank the projects based on their IRRs.<\/p>\n
c.\u2003\u2003Calculate the PI for both projects. Rank the projects based on their PIs<\/p>\n","protected":false},"excerpt":{"rendered":"
Business Finance I-FIN 315: Homework Assignment: 1. Long-term investment\u200b\u00a0decision, payback method Personal Finance Problem. Bill Williams has the opportunity to invest in project A that costs $5,900 today and promises to pay $2,100\u200b, $2,400\u200b, $2,400\u200b, $2,000 and $1,800 over the next 5 years. \u200b\u00a0Or, Bill can invest $5,900 in project B that promises to pay […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[10],"class_list":["post-78119","post","type-post","status-publish","format-standard","hentry","category-research-paper-writing","tag-writing"],"_links":{"self":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/posts\/78119","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/comments?post=78119"}],"version-history":[{"count":0,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/posts\/78119\/revisions"}],"wp:attachment":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/media?parent=78119"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/categories?post=78119"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/tags?post=78119"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}