Question

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7)

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10.3 million. Investment A will generate $1.95 million per year? (starting at the end of the first? year) in perpetuity. Investment B will generate $1.47

million at the end of the first? year, and its revenues will grow at 2.2% per year for every year after that.

a. Which investment has the higher? IRR?

b. Which investment has the higher NPV when the cost of capital is 7.8%??

c. In this? case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best? opportunity?

a. Which investment has the higher? IRR?

The IRR of investment A is -------?%. (Round to the nearest? integer.)

9)

Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $17 million upfront investment and will generate $20 million in savings for Facebook each year for the next 3 years. The second bid from Cisco requires a $82 million upfront investment and will generate $60 million in savings each year for the next 3 years. a. What is the IRR for Facebook associated with each bid? b. If the cost of capital for each investment is 12%, what is the net present value (NPV) for Facebook of each bid? Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the lease, Facebook will pay $24 million upfront, and $35 million per year for the next 3 years. Facebook's savings will be the same as with Cisco's original bid. c. Including its savings, what are Facebook's net cash flow under the lease contract? What is the IRR of the Cisco bid now? d. Is this new bid a better deal for Facebook than Cisco's original bid? Explain. a. What is the IRR for AOL associated with each bid? The IRR associated with the first bid from Huawei is --------%.(Round to one decimal place.)

10)

Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $21 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 45% will come from customers who switch to the new, healthier pizza instead of buying the original version.?? a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? b. Suppose that 44% of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case? a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new pizza? The incremental sales are $ -------- million. (Round to two decimal places.)

11) Cellular Access Inc., is a cellular telephone service provider that reported net operating profit after tax (NOPAT) of $241 million for the most recent fiscal year. The firm had depreciation expenses of $102 million, capital expenditures of $220 million, and no interest expenses. Working capital increased by $13 million. Calculate the free cash flow for Cellular Access for the most recent fiscal year. The free cash flow is $ --- million. (Round to the nearest integer.)

12) A bicycle manufacturer currently produces 255,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $253,000 and would be obsolete after ten years. This investment could be depreciated to zero for tax purposes using a ten-year straight-line depreciation schedule. The plant manager estimates that the operation would require $27,000 of inventory and other working capital upfront (year 0), but argues that this sum can be ignored since it is recoverable at the end of the ten years. Expected proceeds from scrapping the machinery after ten years are $18,975. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier? Project the annual free cash flows (FCF) of buying the chains. The annual free cash flows for years 1 to 10 of buying the chains is $ ------. (Round to the nearest dollar. Enter a free cash outflow as a negative number.)

Answer 1

.Answer for a,

Incase of InvestmentA, In perpetuity, Return = (Annual Cash flow / Initial investment)X 100, Here in case of Investment A,

IRR is the return = ($1.95 million / $10.3million) X 100 = 18.9320388349515?%, rounded to 2 integer = 18.93%, rounded integer = 19%

In case of Investment B, this is growth model, the formula will be like Formula for Cost of Equity when dividents is growing,

Formula for Ke = (Divident / Market Price) X 100 + growth rate

here the concept is same and the formula will be (Cashflow / Initial Investment) X 100 + Growth rate =

It is given that growth at 2.2% per year for every year,

Cash flow in year 1 is $1.47million Initial investment will be same as Investment A = $10.3million, when we are applying value in Formula, it will be ($1.47million / $10.3million) X 100 ) + 2.2% = 14.2718446601942% + 2.2% = 16.4718446601942% rounded to 2 ineger = 16.47%, rounded nearest integer = 16%

Here Investment A has higher IRR which is 18.9320388349515?%, rounded to 2 integer = 18.93%, rounded integer = 19%

Answer to Question b.

Which investment has the higher NPV when the cost of capital is 7.8%??

NPV = Present value of inflow - Initial outlay,

In case of Investment A, is a perpetuity, in such situations we can find out Present value by deviding the Cash inflow by Cost of Capital, formula will be

Present value = Annual cash inflow / Cost of Capital = $1.95 million ? / 7.8% = 25,

NPV? of Investment A will be= $25 million - $10.3million = $14.7 million,

In case of Investment B, growth model, in such situation, We can find out Present value in one growth and applyConcept for computing Equity share price when having growth in divident under divident discount model    (formula of D1 / (Ke - Growth rate) and discount it using the discount factor before the year in which the growth rate will be stable) here only one stage growth and so it is very simple. Present value = Annual cash flow X PV factor or discount factor.

PV factor or discount factor? = 1/(1+i)n, here n = 1, i= 7.8% or 0.078, = 1/1.078 or 0.927643784786642

The present value of cashflows after year1 = (year1 cashflow X (1+growth rate )) / (Cost of Capital - Growth Rate)X year1 Discount factor =($1.47million X 1.022) / 0.078 -0.022 X(1/1.078) =

So PV = $24.8863636363636 millions?, NPV= $24.8863636363636 millions? - $10.3Millions, = $14.5863636363636 millions.

Investment A has higher NPV of $14.7millions.

Answer to c, Based on IRR and NPV methods, Investment of A will be the Best Investment opportunity.

Answer to Question 9, a. What is the IRR for Facebook associated with each bid?

for computing IRR first, we have to identify Lowest Discount rate at which getting positive NPV and we have to identify Highest Discount rate at which getting negative NPV. then find out the values of terms in formula andapply values

IRR = LR +(NPV @ LR /(NPV@ LR - NPV @ HR))X (HR-LR)?, LR = Lowest Discount rate?, 100%

HR = Highest Discount rate, 110%

IRR of bid from Huawei, a $17 million upfront investment, annual cost savings $20 million

	Annual Cash flow		Present Value of cash
year	in $million	Discount Factor @110%	Inflow in$ million
1	20	0.4761904761904760	9.52380952380952
2	20	0.2267573696145120	4.53514739229025
3	20	0.1079796998164350	2.15959399632869
		Total Present Value	16.21855091242850
		Initial outlay	17.00
		NPV @HR	-0.781449087571538
	Annual Cash flow		Present Value of cash
year	in $million	Discount Factor @100%	Inflow in$ million
1	20	0.5000000000000000	10.00000000000000
2	20	0.2500000000000000	5.00000000000000
3	20	0.1250000000000000	2.50000000000000
		Total Present Value	17.50000000000000
		Initial outlay	17.00
		NPV @ LR	0.50

applying values in formula, 100% + ((0.50/(0.50 - ^- 0.781449087571538) X (110-100))% = 100%+3.90183273646513% = 103.90183273646513%, rounded to 1 decimal places = 103.9?%,

Evaluation of bid from Cisco requires a $82 million upfront investment and will generate $60 million in savings each year for the next 3 years.

Formula for IRR will be same as above but values will have change

HR = 60%, LR = 50% NPV @ HR = ^-6.4140625000000, NPV @ LR = 2.44444444444440

	Annual Cash flow		Present Value of cash
year	in $million	Discount Factor @60%	Inflow in$ million
1	60	0.6250000000000000	37.50000000000000
2	60	0.3906250000000000	23.43750000000000
3	60	0.2441406250000000	14.64843750000000
		Total Present Value	75.58593750000000
		Initial outlay	82.00
		NPV @HR	-6.4140625000000
	Annual Cash flow		Present Value of cash
year	in $million	Discount Factor @50%	Inflow in$ million
1	60	0.6666666666666670	40.00000000000000
2	60	0.4444444444444440	26.66666666666670
3	60	0.2962962962962960	17.77777777777780
		Total Present Value	84.44444444444440
		Initial outlay	82.00
		NPV @ LR	2.44444444444440

Applying values in formula,

50% + ((2.44444444444440? / (2.44444444444440? - ^- 6.4140625000000?) X (60 - 50)) %,

= 50% +2.75943165115138% = 52.75943165115138%.

Rounded to 1 decimal places =52.8%,

Answer to Question 9,b. If the cost of capital for each investment is 12%, what is the net present value (NPV) for Facebook of each bid?

NPV = Present value of cash inflow - initial outlay,

Present value of cash inflow? = Annual cash flow X Discount factor,

Discount? Factor = (1+i)ⁿ , where i = Cost of capital , 12% is given, n is the corresponding year

NPV of bid from Huawei is as follows

	Annual Cash flow		Present Value of cash
year	in $million	Discount Factor @12%	Inflow in$ million
1	20	0.8928571428571430	17.85714285714290
2	20	0.7971938775510200	15.94387755102040
3	20	0.7117802478134110	14.23560495626820
		Total Present Value	48.03662536443150
		Initial outlay	17.00
		NPV bid from Huawei	31.0366253644315

Rounded to 1 decimal places = $31.0 million,

NPV of bid from Cisco is as follows

	Annual Cash flow		Present Value of cash
year	in $million	Discount Factor @12%	Inflow in$ million
1	60	0.8928571428571430	53.57142857142860
2	60	0.7971938775510200	47.83163265306120
3	60	0.7117802478134110	42.70681486880460
		Total Present Value	144.10987609329400
		Initial outlay	82.00
		NPV bid from Cisco	62.1098760932944

NPV bid from Cisco? rounded to 1 decimal place = $61.1million

Answer to Question 9c. Including its savings, what are Facebook's net cash flow under the lease contract?

Net annual cash flow = annual cash inflow - annual cash outflow.

Cash out flow in year 0 (now)$24 million

Annual Cash inlfow = $60 million, annual cash outflow = $35 million, annual net cash outflow = 60-35 = $25million.

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