#1 Net Present Value Method, Internal Rate of Return Method, and Analysis

The management of Quest Media Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:

The radio station requires an investment of $1,113,270, while the TV station requires an investment of $2,198,350. No residual value is expected from either project.

Required:

1a. Compute the net present value for each project. Use a rate of 10% and the present value of an annuity of $1 in the table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest whole dollar.

1b. Compute a present value index for each project. If required, round your answers to two decimal places.

2. Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1 and (b) using the present value of an annuity of $1 in the table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest whole percent.

3. The net present value, present value index, and internal rate of return all indicate that the   is a better financial opportunity compared to the  , although both investments meet the minimum return criterion of 10%.

#2 Average Rate of Return Method, Net Present Value Method, and analysis for a Service Company

The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:

Each project requires an investment of $368,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis.

Required:

1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.

1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest dollar.

2. The   net present value exceeds the selected rate established for discounted cash flows (15%), while the   does not. Thus, considering only quantitative factors, the   investment should be selected.

The Sorensen Supplies Company recently purchased a new delivery truck. The initial cash outflow for the new truck is $20,500, and it is expected to generate after-tax cash flows of $5,725 per year. The truck has a 5-year expected life. The expected year-end abandonment values (after-tax salvage values) for the truck are given below. The company's WACC is 8%.

1. What is the truck's optimal economic life? Round your answer to the nearest whole number.

      year(s)

2. Would the introduction of abandonment values, in addition to operating cash flows, ever reduce the expected NPV and/or IRR of a project?

   -Select-YesNo

Joe’s trading company has the following projected financial results for 2013:

• $4,200,000 sales $3,000,000 cost of goods sold

• $600,000 capital (fixed asset) expenditures

• $300,000 owner’s equity

• $200,000 depreciation (same for tax and book purposes)

• $50,000 increase in inventory

• $40,000 decrease in accounts receivable

• $60,000 increase in accounts payable

• $500,000 overhead expenses (excluding Depreciation)

• $ 80,000 interest expense

• 35% effective tax rate.

Please calculate the following a) Joe’s cash flow: _________ b) Joe’s net income for 2013: _________ c) Gross Margin % _________ d) Profit Margin % _________

It is now January 1, 2019, and you are considering the purchase of an outstanding bond that was issued on January 1, 2017. It has an 8.5% annual coupon and had a 15-year original maturity. (It matures on December 31, 2031.) There is 5 years of call protection (until December 31, 2021), after which time it can be called at 108—that is, at 108% of par, or $1,080. Interest rates have declined since it was issued, and it is now selling at 111.55% of par, or $1,115.50.

a. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

What is the yield to call? Do not round intermediate calculations. Round your answer to two decimal places.

b. If you bought this bond, which return would you actually earn?

I. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

II.Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

III. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

IV. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

c. Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely?

I. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.

II. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

III. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.

IV. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.

The Butler-Perkins Company (BPC) must decide between two mutually exclusive projects. Each project has an initial outflow of $6,750 and has an expected life of 3 years. Annual project cash flows begin 1 year after the initial investment and are subject to the following probability distributions:

BPC has decided to evaluate the riskier project at 11% and the less-risky project at 8%.

1. What is each project's expected annual cash flow? Round your answers to the nearest cent.

   Project A:	$
   Project B:	$

   
   Project B's standard deviation (σ_B) is $5,798 and its coefficient of variation (CV_B) is 0.76. What are the values of (σ_A) and (CV_A)? Do not round intermediate calculations. Round your answer for standard deviation to the nearest cent and for coefficient of variation to two decimal places.

   σA:	$
   CVA:

2. 
   
3. Based on their risk-adjusted NPVs, which project should BPC choose?
   -Select-Project AProject BItem 5
4. 
   
5. If you knew that Project B's cash flows were negatively correlated with the firm's other cash flow, whereas Project A's flows were positively correlated, how might this affect the decision?
   -Select-This would make Project B more appealing.This would make Project B less appealing.Item 6
   
   If Project B's cash flows were negatively correlated with gross domestic product (GDP), while A's flows were positively correlated, would that influence your risk assessment?
   -Select-This would make Project B more appealing.This would make Project B less appealing.

Harrimon Industries bonds have 5 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 9%.

1. What is the yield to maturity at a current market price of
   1. $858? Round your answer to two decimal places.

          %

   2. $1,087? Round your answer to two decimal places.

          %

2. Would you pay $858 for each bond if you thought that a "fair" market interest rate for such bonds was 12%—that is, if r_d = 12%?
   1. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   2. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.
   3. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   4. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.
   5. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.

6. Assume that commercial paper maturing in 75 days, with a par value of $1,000,000, currently sells for a price of $995,000.

A. If you purchase this commercial paper today:

• What is your expected holding period return? • What is your (expected) annualized yield? What is the effective annual return on this investment?

B) When comparing the annualized yield on this security to the annualized yield on a 75-day T-Bill:

• What is one reason why you would expect the commercial paper yield to be higher than the T-Bill yield? Explain (but in one sentence).

• What is one reason why you would expect the commercial paper yield to be only slightly higher than the T-Bill yield? Explain (but in one sentence).

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company’s finance department.

One of the major revenue-producing items manufactured by Conch Republic is a smartphone. Conch Republic currently has one smartphone model on the market, and sales have been excellent. The smartphone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Page 349Buffett music. However, as with any electronic item, technology changes rapidly, and the current smartphone has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new smartphone that has all the features of the existing smartphone but adds new features such as WiFi tethering. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new smartphone.

Conch Republic can manufacture the new smartphones for $220 each in variable costs. Fixed costs for the operation are estimated to run $6.4 million per year. The estimated sales volume is 155,000, 165,000, 125,000, 95,000, and 75,000 per year for the next five years, respectively. The unit price of the new smartphone will be $535. The necessary equipment can be purchased for $43.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $6.5 million.

As previously stated, Conch Republic currently manufactures a smartphone. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new smartphone, sales will be 95,000 units and 65,000 units for the next two years, respectively. The price of the existing smartphone is $385 per unit, with variable costs of $145 each and fixed costs of $4.3 million per year. If Conch Republic does introduce the new smartphone, sales of the existing smartphone will fall by 30,000 units per year, and the price of the existing units will have to be lowered to $215 each. Net working capital for the smartphones will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year’s sales. Conch Republic has a 21 percent corporate tax rate and a required return of 12 percent.

Shelley has asked Jay to prepare a report that answers the following questions.

QUESTIONS

What is the payback period of the project?

What is the profitability index of the project?

What is the IRR of the project?

What is the NPV of the project?

How JOBS act affect private equity investment in the near future?

What are some changes that could be made to improve the law or the legal system? The improvements could be aimed at specific laws or procedures, or even at the basic business of law.

Explain the importance of Time Value of Money concept.

Detail about how the value of money changes in relation to time.

Also explain the change is purchasing power of the money in relation to time.

The Johnson Research Organization, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of seven years so it will not have to use outsiders' laboratories for certain types of work. The following are all of the cash flows affected by the decision: Use Exhibit A.8.

Required:

Calculate the net present value of this decision. (Round PV factor to 3 decimal places.)

1. Internal Rate of Return Method—Two Projects

Munch N’ Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $44,209.44 and could be used to deliver an additional 40,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.38. The delivery truck operating expenses, excluding depreciation, are $0.52 per mile for 14,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $54,765. The new machine would require three fewer hours of direct labor per day. Direct labor is $15 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-year lives. The minimum rate of return is 9%. However, Munch N’ Crunch has funds to invest in only one of the projects.

a. Compute the internal rate of return for each investment. Use the above table of present value of an annuity of $1. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.

2.

Net Present Value Method and Present Value Index

Diamond and Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 110 baseballs per hour to sewing 198 per hour. The contribution margin per unit is $0.38 per baseball. Assume that any increased production of baseballs can be sold. The second machine is an automatic packing machine for the golf ball line. The packing machine will reduce packing labor cost. The labor cost saved is equivalent to $20 per hour. The sewing machine will cost $167,400, have a six-year life, and will operate for 1,400 hours per year. The packing machine will cost $85,800, have a six-year life, and will operate for 1,200 hours per year. Diamond and Turf seeks a minimum rate of return of 12% on its investments.

a. Determine the net present value for the two machines. Use the table of present values of an annuity of $1 above. Round to the nearest dollar.

b. Determine the present value index for the two machines. If required, round your answers to two decimal places.

3.

Net Present Value—Unequal Lives

Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $625,304. The net cash flows estimated for the two proposals are as follows:

The estimated residual value of the processing mill at the end of Year 4 is $270,000.

Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 15%. Use the present value table appearing above.

Describe how someone’s risk tolerance directly impacts their retirement planning. Use an example to illustrate how much difference it would make if someone was a conservative investor who averaged a 7% return over 32 years on their savings versus another more aggressive investor who averages 11% over the same period. Interpret your results: advantages and disadvantages of the two investment strategies

ou are given the following information on Parrothead Enterprises: Debt: 9,200 7.3 percent coupon bonds outstanding, with 22 years to maturity and a quoted price of 108.5. These bonds pay interest semiannually and have a par value of $2,000. Common stock: 315,000 shares of common stock selling for $66.30 per share. The stock has a beta of 1.08 and will pay a dividend of $4.50 next year. The dividend is expected to grow by 5.3 percent per year indefinitely. Preferred stock: 9,800 shares of 4.65 percent preferred stock selling at $95.80 per share. The par value is $100 per share. Market: 10.2 percent expected return, risk-free rate of 4.5 percent, and a 23 percent tax rate. Calculate the company's WACC.