Instructions
Please complete the following
· Problem P10-24
· Problem P10-28
· Problem P11-11
· Problem P11-16
· Problem P12-12
· Problem P12-20
· Problem P12-28
Ca
y all calculations to TWO decimal places to reduce rounding e
or, especially in multi-step problems.
Remember to show all calculations. You must show your calculation and solution. please see the example below. If you do not show how you a
ived at your answers, you will not receive credit. Merely showing the formula without the calculations is not sufficient. The problems should be set up in columns or using other appropriate formats—do not hide all steps in formulas behind one answer. I must still be able to see how you a
ived at the answer. EXAMPLE OF HOW WORK SHOULD LOOK please see below
Example (please be sure to show the formula in answers and calculations)
· Problem P10-24
All techniques, conflicting rankings: Nicholson Roofing Materials Inc., is considering two mutually exclusive projects that both cost $150,000. The company’s board of directors has set a maximum four-year payback requirement; the cost of capital is 9%. The project cash flows appear below.
a. Calculate the payback period for each project.
. Calculate the NPV of each project at 0%.
c. Calculate the NPV of each project at 9%.
d. Derive the IRR of each project.
e. Rank the projects by each of the techniques used. Make and justify a recommendation.
f. Go back one more time and calculate the NPV of each project using a cost of capital of 12%. Does the ranking of the two projects change compared to your answer in part e ? why?
· Problem P10-28
All techniques with NPV profile: Mutually exclusive project: Projects A and B are alternatives for expanding Rosa Company's capacity. The firm’s cost of capital is 13%. The cash flows for each project are shown in the following table
a. Calculate each project’s payback period.
. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the NPV profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preference dictated by each measure and indicate which project you would recommend. Explain why.
· Problem P11-11
Calculating initial cash flow: Vastine Medical Inc. is replacing its computer system, which was purchased two years ago at a cost of $325,000. The system can be sold today for $200,000 It is being depreciated using MACRS and a five-year recovery period. A new computer system will cost $500,000 to purchase and install. Replacement of the computer system would involve any change in net working capital. Assume a 21% tax rate.
a. Calculate the book value of the existing computer system (see Table 4.2)
. Calculate the after-tax proceeds of its sale for $200,000
c. Calculate the initial cash flow associated with the replacement project.
· Problem P11-16
Operating cash inflows: A firm is considering renewing it’s equipment to meet increased demand for its products. The cost of equipment modifications is $1.9 million plus $100,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a five-year recovery period. (See Table 4.2 for the applicable depreciation percentages.) Additional sales revenue from the renewal should amount to $1,200,000 per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 40% of the additional sales. The firm is subject to a tax rate of 21%. ( Note: Answer the following questions for each of the next six years.)
a. What net incremental earnings before interest, taxes, depreciation, and amortization will result from the renewal?
. What net incremental operating profits after taxes will result from the renewal?
c. What net incremental operating cash flows will result from the renewal?
· Problem P12-12
Break-even cash inflows and risk: Boardman Gases and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Boardman to build a new gas production facility close to an existing semiconductor plant. Once the new gas plant is in place, Boardman will be the exclusive supplier for the semiconductor fa
ication plant for the subsequent 10 years. Boardman is considering one of two plant designs. The first is for Boardman’s “standard” plant, which will cost $385 million to build. The second is for a “custom” pant, which will cost $53.5 million to build. The custom plant will allow Boardman to produce the highly specialized gases required for an emerging semiconductor manufacturing process. Boardman estimates that a standard plant will generate free cash flow annually. Boardman has enough money to build either type of plant and, in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 16.9%.
a. Find the NPV for each project. Are the projects acceptable?
. Find the
eak-even free cash flow for each project.
c. The firm has estimated the probabilities of achieving various ranges of free cash flow for the two projects, as shown in the following table. What is the probability that each project will achieve at least the
eak-even free cash flow found in part b?
d. Which project is more risky? Which project has the potentially higer NPV? Discuss the risk-return tradeoffs of the two projects.
e. If the firm wished to minimize losses (i.e., NPV<$0), which project would you recommend ? which would you recommend if the goal were to achieve a higer NPV?
· Problem P12-20
Risk-adjusted discount rates:Basic : 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 20%. The firm has estimated each project’s cash flow and each projects’s beta, as shown in the following table.
a. Find the NPV of each project, using the firm’s cost of capital. Which project is prefe
ed in this situation?
. The firm uses the following equation to determine the risk-adjusted discount rate, RADRi, for each project i;
Substitute each project’s beta into this equation to determine it’s RADR.
c. Use the RADR for each project to determine it’s risk - adjusted NPV. Which project is preferable in this situation?
d. Compare and discuss your findings in parts a and c. Which project do you recommend that the firm accept?
· Problem P12-28
Capital rationing:NPV approach: A firm with a 13% cost of capital must select the optimal group of projects from those shown in the following table, given it’s capital budget of $1 million.
a. Calculate the present value of cash inflows associated with each project.
. Select the optimal group of projects, keeping in mind that unused funds are costly.