Question
In: Finance
Project 1 Project 2 Project 3 Project 4 Initial CF -4,000,000 -5,000,000 -10,000,000 5,000,000 Year 1...
| Project 1 | Project 2 | Project 3 | Project 4 | |||
| Initial CF | -4,000,000 | -5,000,000 | -10,000,000 | 5,000,000 | ||
| Year 1 CF | 1,000,000 | 2,000,000 | 4,000,000 | 2,700,000 | ||
| Year 2 CF | 2,000,000 | 3,000,000 | 6,000,000 | 2,700,000 | ||
| Year 3 CF |
|
3,000,000 | 5,000,000 |
|
You have a $10 million capital budget and must make the decision about which investments your firm should accept for the coming year. The firm’s cost of capital is 12 percent. Use the information on the four projects to determine what project(s) your firm should accept on the basis of NPV?
Projects 3, 4
Projects 1, 2
Project 3
Projects 2, 4
Solutions
Expert Solution
NPV = Initial cash outlay + PV of all the cash inflows
PV of cash flow at time n = Cash flow at time n/ ((1+r)^n)
NPV = -CF0 + (CF1/((1+Cost of capital)^1)) + (CF2/((1+Cost of capital)^2)) + (CF3/((1+Cost of capital)^3
NPV of Project 1 = -4,000,000+ (1,000,000/((1+12%)^1)) + (2,000,000/((1+12%)^2)) + (3,000,000/((1+12%)^3
= $622,585.64
NPV of Project 2 = -5,000,000+ (4,000,000/((1+12%)^1)) + (3,000,000/((1+12%)^2)) + (3,000,000/((1+12%)^3
= $1,312,636.7
NPV of Project 3 = -10,000,000+ (4,000,000/((1+12%)^1)) + (6,000,000/((1+12%)^2)) + (5,000,000/((1+12%)^3
= $1,913,493.1
NPV of Project 4 = -5,000,000+ (2,700,000/((1+12%)^1)) + (2,700,000/((1+12%)^2)) + (2,700,000/((1+12%)^3
= $1,484,944.42
| Project | NPV |
| 1 | 622,585.64 |
| 2 | 1,312,636.70 |
| 3 | 1,913,493.10 |
| 4 | 1,484,944.42 |
We need to maximize our NPV.
Project 3 & 4 could not be opted because it's not meeting our capital budget of $10 million
Projects 1 and 2's total NPV = $1,935,222.34
Project 3's NPV = $1,913,493.10
Projects 2, 4's total NPV = 2,797,581.12
We will choose Optin D(Projects 2, 4) as in that we are getting the maximum NPV
jeff jeffy answered 2 years agoRelated Solutions
Project 1 Project 2 project 3 Project 4 Initial CF -4,000,000 -5,000,000 -10,000,000 5,000,000 Year 1...
Project 1
Project 2
project 3
Project 4
Initial CF
-4,000,000
-5,000,000
-10,000,000
5,000,000
Year 1 CF
1,000,000
2,000,000
4,000,000
2,700,000
Year 2 CF
2,000,000
3,000,000
6,000,000
2,700,000
Year 3 CF
3,000,000
3,000,000
5,000,000
2,700,000
You have a $10 million capital budget and must make the decision
about which investments your firm should accept for the coming
year. The firm’s cost of capital is 12 percent. Use the information
on the four projects to determine what project(s) your firm should...
Firm ABC’s projected cash flows are as follows Year 1 2 3 4 and 4+ CF...
Firm ABC’s projected cash flows are as follows
Year
1
2
3
4 and 4+
CF
3,000
5,000
8,000
Grow at g = 1% forever
We can choose one of the following two capital structure
plans:
Debt
Equity
Plan A
20%
80%
Plan B
50%
50%
Plan C
70%
30%
The cost of debt are as follows
Debt
Cost of debt
Plan A
20%
risk-free rate + 0.5%
Plan B
50%
risk-free rate + 1%
Plan C
70%
risk-free rate...
Project Wind Power Year 0 Year 1 Year 2 Year 3 Costs $6,000,000 $4,000,000 $0 $0...
Project Wind Power
Year 0
Year 1
Year 2
Year 3
Costs
$6,000,000
$4,000,000
$0
$0
Benefits
$18,000,000
$15,000,000
$12,000,000
$12,000,000
Project Hydroelectric power
Year 0
Year 1
Year 2
Year 3
Costs
$4,000,000
$2,000,000
$1,000,000
$0
Benefits
$10,000,000
$14,000,000
$15,000,000
$16,000,000
If the interest rate is 3%, which project would you choose and
why? Show your work using excel (15 points)
If the interest rate is 15%, which project would you choose and
why? Show your work using excel...
Dr. Chan is considering a four year project. The project requires an initial investment of $10,000,000...
Dr. Chan is considering a four year project. The project
requires an initial investment of $10,000,000 to buy new equipment.
The equipment will be depreciated straight line to zero over the
project’s life. The company believes it can generate $5,000,000 in
pretax revenues in year 1. Revenues will increase at 20% per year.
Total pretax operating cost would be 40% of the pretax revenues.
Net working capital will be 20% of the pretax revenue for the year.
Net working capital...
Firm Abs will incur $5,000,000 in initial capital outlays in Year 1, $3,000,0000 in Year 2...
Firm Abs will incur $5,000,000 in initial capital outlays in
Year 1, $3,000,0000 in Year 2 and $1,000,0000 in Year 3. Since the
company does not expect to be able to produce or sell its product
until Year 2, it will not incur any labor and materials cost in
Year 1. Based on marketing research and forecasting tools, Firm Abs
to sell 6,000 units in Year 2 at a price of $320 and then expect
that quantity to double in...
Project 1 Project 2 Initial Year 1 $ 35,000 $ 35,000 Year 2 5,000 16,000 Year...
Project 1
Project 2
Initial Year 1
$ 35,000
$ 35,000
Year 2
5,000
16,000
Year 3
16,000
23,000
Year 4
22,000
12,000
Year 5
(3,600)
11,600
Estimated scrap value
5,000
5,000
Cost of capital 14%
Calculate:
Payback period
Average rate of return on initial
investment
Net present value
Project Year 0 Year 1 Year 2 Year 3 Year 4 A -$ 49 $ 25...
Project Year 0 Year 1 Year 2 Year 3 Year 4
A -$ 49 $ 25 $ 22 $ 22 $ 15
B -$ 101 $ 19 $ 39 $ 51 $ 61
a. What are the IRRs of the two projects?
b. If your discount rate is 4.8%, what are the NPVs of the two
projects?
c. Why do IRR and NPV rank the two projects differently?
TABLE 4 Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cash...
TABLE 4
Project
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Cash Flow
Cash Flow
Cash Flow
Cash Flow
Cash Flow
Cash Flow
A
-15000
6000
7000
6000
6000
6000
B
-15000
7000
7000
7000
7000
7000
C
-18000
12000
2000
2000
2000
2000
"Consider the cash flow of the three projects depicted in Table
4. The cost of capital is 7.5%. If an investor decided to take
projects with a payback period of 2 years...
2. Initial Outlay -$5,000 Year 1 $3,000 Year 2 $3,500 Year 3 $3,200 Year 4 $2,800...
2. Initial Outlay -$5,000 Year 1 $3,000 Year 2 $3,500 Year 3
$3,200 Year 4 $2,800 Year 5 $2,500
a. What is the PI if the discount rate is 20%? Round to the
second decimal place. Type only numbers without any unit ($, %,
etc.)
b. What is the NPV if the discount rate is 20%? Round to the
second decimal place. Type only numbers without any unit ($, %,
etc.) If there are multiple answers, then type NA.
c....
You are evaluating a project for your company. The initial outlay for the project is $5,000,000,...
You are evaluating a project for your company. The initial
outlay for the project is $5,000,000, and free cash flows for the
project are $1,000,000, $3,000,000, $3,000,000, $4,000,000 and
$4,000,000. For risk analysis, you utilize the Payback and
Discounted Payback methods to trigger increased risk scrutiny. Your
standard is, any project that goes longer than 3 years under either
metric will go through these increased risk tests.
If your required rate is 12%, does this project qualify for
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