Question

In: Finance

1. Assume the following for a project under evaluation: ** The project's life is 4 years....

1. Assume the following for a project under evaluation:

** The project's life is 4 years.

** The total time zero, initial cost of $55,000.

** The total net operating cash flow each year is $15,000.

** In addition to the terminal year operating cash flow, there is a non-operating, terminal year cash flow of $8,000.

What is the project's IRR? Accept or reject the project? Again, assume the cost of capital for a project of this risk is 7%.

		7%; indifferent to accept or reject
		8.4%; reject
		8.4%; accept
		15.75%, reject
		15.75%: accept

2. Barmin's Corp. has acquired an additional company by purchasing its outstanding stock. Analysts forecast a period of 2 years of extraordinary growth (20 percent), followed by 1 year of unusual growth (10 percent), and finally a normal (sustainable) growth rate of 6.5 percent annually indefinitely. The last dividend was D0= $1.00 per share and the required return is 8.6%. What is D4 (i.e., the dividend expected at end of period 4)?

		1.0000
		1.286
		1.584
		1.687
		1.440

Expert Solution

1)

IRR is the rate of return that makes NPV = 0

NPV = Present value of cash inflows - present value of cash outflows

-55,000 + 15,000 / ( 1 + R)¹ + 15,000 / ( 1 + R)² + 15,000 / ( 1 + R)³ + 23,000 / ( 1 + R)⁴ = 0

using trial and error method i.e, trying out different values from the option. Lets try 8.4

-55,000 + 15,000 / ( 1 + 0.084)¹ + 15,000 / ( 1 + 0.084² + 15,000 / ( 1 + 0.084)³ + 23,000 / ( 1 + 0.084)⁴ = 0

0 = 0

8.4%; accept

We will accept the project since IRR is greater than cost of capital.

2)

Year 1 dividend = 1 * 1.2 = 1.2

Year 2 dividend = 1.2 * 1.2 = 1.44

year 3 dividend = 1.44 * 1.1 = 1.584

Year 4 dividend = 1.584 * 1.065 = 1.687

jeff jeffy answered 2 years ago

A project under evaluation has a first cost of $35,000. The firm’s MARR is 15%. Assume...

A project under evaluation has a first cost of $35,000. The firm’s MARR is 15%. Assume the probability distributions for annual benefit and life are unrelated and statistically independent. Calculate the expected value for the Present Worth. Annual Benefit Probability Live Probability $17,000 0.2 5 0.27 19,000 0.3 5 0.27 22,000 0.5 5 0.27 $17,000 0.2 7 0.45 19,000 0.3 7 0.45 22,000 0.5 7 0.45 $17,000 0.2 9 0.28 19,000 0.3 9 0.28 22,000 0.5 9 0.28

Consider a project with a life of 4 years with the following information: initial fixed asset...

Consider a project with a life of 4 years with the following information: initial fixed asset investment = $380,000; straight-line depreciation to zero over the 4-year life; zero salvage value; price = $28; variable costs = $15; fixed costs = $121,600; quantity sold = 54,720 units; tax rate = 25 percent. How sensitive is OCF to changes in quantity sold?

The Down Towner is considering a project with a life of 4 years that will require...

The Down Towner is considering a project with a life of 4 years that will require $164,800 for fixed assets and $42,400 for net working capital. The fixed assets will be depreciated using the Year 2018 bonus depreciation method. At the end of the project, the fixed assets can be sold for $37,500 cash and the net working capital will return to its original level. The project is expected to generate annual sales of $195,000 and costs of $117,500. The...

A project will produce cash inflows of $3,100 a year for 3 years. The project's initial...

A project will produce cash inflows of $3,100 a year for 3 years. The project's initial cost is $10,400. What is the profitability index value if the required rate of return is 16 percent? Group of answer choices 0.90 0.33 1.09 0.67 -0.88

You just finished a capital budgeting investment analysis on a $209 million project. The project's life...

You just finished a capital budgeting investment analysis on a $209 million project. The project's life is 10 years and it will generate equal annual after-tax cash operating cash flows of $37.61 million. You assumed a $68 million salvage value, but the project's adjusted tax basis at termination will be $93 million. The project would have no effect on net working capital. With a 27% marginal tax rate, the resulting NPV is $80.93 million. What cost of capital did you...

You just finished a capital budgeting investment analysis on a $156 million project. The project's life...

You just finished a capital budgeting investment analysis on a $156 million project. The project's life is 10 years and it will generate equal annual after-tax cash operating cash flows of $25 million. You assumed a $47 million salvage value, but the project's adjusted tax basis at termination will be $55 million. The project would have no effect on net working capital. With a 24% marginal tax rate, the resulting NPV is $negative 17.853 million. What cost of capital did...

Under which of the following circumstances is the pure play method of estimating a project's beta...

Under which of the following circumstances is the pure play method of estimating a project's beta particularly useful? A. The firm is looking to expand its current business operations, doing essentially the same work. B. The firm is looking to expand its current business operations. The work will be essentially the same as current operations but there is no obvious outside provider of the same service or product. C. The firm is looking to expand its current business operations into...

Gio's Restaurants is considering a project with the following expected cash flows: . If the project's...

Gio's Restaurants is considering a project with the following expected cash flows: . If the project's appropriate discount rate is 11 percent, what is the project's discounted payback period? YEAR PROJECT CASH FLOW 0 −$240240 million 1 100100 million 2 6060 million 3 100100 million 4 100100 million

A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and...

A suggested project requires initial fixed assets of $227,000, has a life of 4 years, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are projected at 31,000 units per year, the price per unit is $47, variable cost per unit is $23, and fixed costs are $842,900 per year. The tax rate is 23 percent and the required return is 11.5 percent. Suppose the projections given for price and quantity...

PLEASE SHOW CALCULATOR INPUTS Reynolds Metals is considering a project with a life of 4 years...

PLEASE SHOW CALCULATOR INPUTS Reynolds Metals is considering a project with a life of 4 years that will produce annual operating cash flows of $57,000. During the life of the project, inventory will be lowered by $28,000, accounts receivable will increase by $15,000 and accounts payable will increase by $6,000. The project requires the purchase of equipment at an initial cost of $104,000 that will be depreciated straightline to a zero book value over the life of the project. Ignore...