Question
In: Finance
Ten capital spending proposals have been made to the budget committee as the members prepare the...
Ten capital spending proposals have been made to the budget committee as the members prepare the annual budget for their firm. Each independent project has a 5-year life and no salvage value.
| Project | Initial cost (thousands) | Uniform Annual Benefit (thousands) | Rate of return |
| A | $10 | $2.98 | 15% |
| B | $15 | $5.58 | 25% |
| C | $5 | $1.53 | 16% |
| D | $20 | $5.55 | 12% |
| E | $15 | $4.37 | 14% |
| F | $30 | $9.81 | 19% |
| G | $25 | $7.81 | 17% |
| H | $10 | $3.49 | 22% |
| I | $5 | $1.67 | 20% |
| J | $10 | $3.20 | 18% |
(a) Based on a MARR of 14%, which projects should be approved?
(b) Rank-order all the projects according to desirability.
(c) If only $70,000 is available, which projects should be approved?
(d) Are the results the same if the projects are ranked on IRR? What is the opportunity cost of capital?
Please provide step by step solutions. Good solution = automatic thumbs up!
Solutions
Expert Solution
a) Based on a MARR of 14%, below yellow highlighted project should be approved:
b)
As per above rate of return below is the rank of desirabilty: B, H, I,F, J, G, C, A, E and D
c) If only $70000, is available all the capital should be invested into highest return project i.e. Project B
d)
As the above IRR calculation below is new rank of projects as per desirability:
| Project | IRR |
| B | 25.0% |
| H | 22.0% |
| I | 19.9% |
| F | 19.0% |
| J | 18.0% |
| G | 17.0% |
| C | 16.1% |
| A | 15.0% |
| E | 14.0% |
| D | 12.0% |
So, we can see that project ranking based on IRR, is also giving the same result.
Opportunity cost of capital is 14% i.e. MARR
jeff jeffy answered 3 weeks agoRelated Solutions
Managerial accountants and the budget committee for the FMI corporation is meeting in November to prepare...
Managerial accountants and the budget committee for
the FMI corporation is meeting in November to prepare the 2019
budget. Your task, as a member of the budget committee, is to
prepare the 2019 budget given the following data:
Sales: The company expects to sell 40% more units in 2019 than in
each quarter of 2018. During 2018, sales were Q1: 40,000; Q2:
30,000; Q3: 60,000 and Q4: 50,000 units. The selling price per unit
is expected to be $50 in...
Your represents the capital budgeting committee of a successful firm. You have been invited to the...
Your represents the capital budgeting committee of a successful
firm. You have been invited to the next Board of Directors meeting
to present your analysis and recommendation on a new capital
project. Your presentation should contain the following: 1. Brief
description of the proposed capital project 2. Estimation of the
incremental cash flows related to the project 3. Estimation of the
weighted average cost of capital 4. Financial evaluation of capital
budget project (using NPV or IRR) 5. Recommendation to...
Two investments (A and B, below) have been proposed to the Capital Investment committee of your...
Two investments (A and B, below) have been proposed to the
Capital Investment committee of your organization;
The required rate of return for your company is 15%. What is
the NPV for each investment? Assume the initial investments ($150k
and $50k) occur at the beginning of the year and all other costs
and benefits occur at the end of the year indicated. Ignore
inflation.
What is the payback period for each investment?
Which investment would you recommend and why?
Why...
Sales and Production Budget II You have been assigned to prepare the cash budget, which is...
Sales and Production Budget II You have been assigned to prepare
the cash budget, which is one portion of the master budget for
Marble Company. According to a credit agreement with the company’s
bank, Marble Company promises to have a minimum cash balance of
$65,000 at each month-end. In return, the bank has agreed that the
company can borrow up to $175,000 at a monthly interest rate of 2%,
paid on the last day of each month. The interest is...
WACC & Capital Budget Analysis Based on the inputs below prepare a capital budget analysis for...
WACC & Capital Budget Analysis
Based on the inputs below prepare a capital budget analysis for
this Base Case using the Net Present Value, Internal Rate of
Return, Profitability Index and Payback in years methods,
determining whether the project is feasible. Please show your
spreadsheet calculations and your final determinations of “go” or
“no go” on the project.
Project Inputs:
WACC – Debt is 70% and Equity is 30% of this firm’s capital
structure. Interest rate on the debt is...
WACC & Capital Budget Analysis Based on the inputs below prepare a capital budget analysis for...
WACC & Capital Budget Analysis
Based on the inputs below prepare a capital budget analysis for
this Base Case using the Net Present Value, Internal Rate of
Return, Profitability Index and Payback in years methods,
determining whether the project is feasible. Please show your
spreadsheet calculations and your final determinations of “go” or
“no go” on the project. Use your Investment Return Analysis as an
example for this capital budget analysis.
Project Inputs:
WACC – Debt is 70% and Equity...
Explain the process to prepare and develop a capital budget.
Explain the process to prepare and develop a capital budget.
(Netherlands and Malaysia ) Discuss attempts that have been made by the authorities to reduce budget...
(Netherlands and Malaysia )
Discuss attempts that have been made by the authorities to
reduce budget deficits post - GFC (from 2010 to 2018). Were they
successful in their endeavour?
a) The 10 members of the committee have to choose one president and two vice presidents...
a) The 10 members of the committee have to choose one president
and two vice presidents (these have to be three different people).
In how many ways can they choose these officers? (Note: here is no
distinction between the two vice presidents; there is not a “first”
VP and a “second” VP).
b) Three couples go to a movie theater. They sit in consecutive
seats such that each couple is seating together, that is each
person is seating next to...
Case Project Your represents the capital budgeting committee of a successful firm. You have been invited...
Case Project Your represents the capital budgeting committee of
a successful firm. You have been invited to the next Board of
Directors meeting to present your analysis and recommendation on a
new capital project. Your presentation should contain the
following: 1. Brief description of the proposed capital project 2.
Estimation of the incremental cash flows related to the project 3.
Estimation of the weighted average cost of capital 4. Financial
evaluation of capital budget project (using NPV or IRR) 5....
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- #Python: A palindrome is a sequence of characters that reads the same backwards as forwards. For...
- Explain an example in which a variable has two different addresses at different places in a...
- Hadley, a thirty-five-year-old physician, has worked at Princeton Plainsboro Hospital for six years. She recently received...
- QUESTION 1. For each of the following, state whether the occurrence of the variable x occurs...
- According to Mike Taft of RVK, the “Markets Group” is an important unit of the Federal...
- Describe the process of STP from implementation to convergence.
- Convert the following numbers as indicated. Use as few digits in the results as necessary or...
ADVERTISEMENT