Question

Part A) The CFO of Jack McCoy Legal Advisors is continually receiving capital funding requests from its division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is:

1. operating at the accounting break-even point.

2. operating at the financial break-even point.

3. facing hard rationing.

4. operating with zero leverage.

5. operating at maximum capacity.

Part B) T-Pain is the capital budgeting manager of Lonely Island Inc. and is faced with selecting from the following independent projects:

Boat: Investment = $75 M, NPV = $141 M, IRR = 16%, PI = 2.88

Poseidon: Investment = $25 M, NPV = $48 M, IRR = 121%, PI = 2.92

Mermaid: Investment = $75 M, NPV = $68 M, IRR = 22%, PI = 1.91

Flippy Floppy: Investment = $75 M, NPV = $55 M, IRR = 7%, PI = 1.73

Buoy: Investment = $25 M, NPV = $39 M, IRR = 18%, PI = 2.56

Titanic: Investment = $100 M, NPV = -$45 M, IRR = 2%, PI = 0.55

If Mr. Pain has a CAPX budget of $125 M, which project(s) should he choose?

1. Project Poseidon, Mermaid, and Buoy

2. Projects Poseidon, Flippy Floppy, and Buoy

3. Projects Poseidon, Mermaid, and Buoy

4. Projects Boat, Poseidon, and Buoy

5. Projects Poseidon and Titanic

Part C) Blue Bloods Furniture is exploring the production of a new line of dinner tables. The project has expected cash flows of $-49,000, $25,000, and $34,000. What is the NPV of the project with an interest rate of 12%?

Part D) The GAP Inc. is considering hiring a new mascot for its Old Navy subsidiary. They will shoot the commercials today and run them over the next four years. What is the discounted payback period of the investment if it requires an investment of $70,000 and provides cash flows of $20,000, $10,000, $50,000, and $30,000? Assume that the cash flows are received at the end of each year (not continuously) and that the appropriate discount rate is 10%. Round your answer, if appropriate, to two decimal places.

*please show work to all parts of the question thank you*

Answer 1

Part A)

The correct answer is

3. Facing hard rationing

As being a financing company and the request of financing is being dcenied all the time and the reason of the deny is only the financial position of the company therefore we can say that the company is facing high rationing.

Part B)

Option	Investment	Total NPV
A	$100M	$140M
B	$(100+25)=$125M	(141+48)=$189M
C	$(199+25+25)=$150M	(141+48+39)=$228M
D	-(Since investment is exceeding 150M)	------
E	-(Since investment is exceeding 150M)	------

Hence the correct option is 3 having total higest NPV values.

Part C)

PV=Cashflow/(1+r)^n

where r=interest rate ; n= no of years;

npv= pv of cash inflows -pv of cash outflows

= -49000/(1+12%)+ 25000/(1+12%)^2+ 34000/(1+12%)^3

=380.3753 $

note: initial cashflow is taken at year 1; if initial cashflow year is at year 0; pv of cashflow= -49000+ 25000/(1+12%)+ 34000/(1+12%)^2 = 426.02

Part D)

Calculation of payback period of the project :

Pay back period = 2 years + ($40,000 / $50,000) **(40,000 = 70,000 - (20,000,+10,000))

= 2.8years

= 2 years 292 days

Hence the project was giving back the initial investment with in a period of 3 years which is in its cash flow period , the project can be accepted.

If theere is discounted rate then the calculation will be different

i.e