Question
In: Finance
As the financial manager of the firm, you are given 6 future projects with their expected cost and yearly profits.
Problem 1:
As the financial manager of the firm, you are given 6 future projects with their expected cost and yearly profits.
|
Year |
Project A |
Project B |
Project C |
Project D |
Project E |
|
0 |
-$500,000.00 |
-$400,000.00 |
-$300,000.00 |
-$200,000.00 |
-$100,000.00 |
|
1 |
$135,000.00 |
$112,500.00 |
$90,000.00 |
$57,500.00 |
$30,000.00 |
|
2 |
$145,000.00 |
$125,000.00 |
$90,000.00 |
$62,500.00 |
$32,000.00 |
|
3 |
$155,000.00 |
$130,000.00 |
$90,000.00 |
$67,500.00 |
$34,000.00 |
|
4 |
$165,000.00 |
$135,000.00 |
$90,000.00 |
$70,000.00 |
$36,000.00 |
|
5 |
$175,000.00 |
$140,000.00 |
$90,000.00 |
$72,500.00 |
$38,000.00 |
- Calculate the NPV for each project if the company has a 10% discount rate
- Calculate the IRR for each project if you can finance and reinvest at 10%
- Your firm has a budget constraint of $800,000. Based on this constraint, which projects should the company implement?
Solutions
Expert Solution
Using excel formula to calculate NPV and IRR
| A | B | C | D | E | ||
| Year | Project A | Project B | Project C | Project D | Project E | |
| 1 | 0 | ($500,000.00) | ($400,000.00) | ($300,000.00) | ($200,000.00) | ($100,000.00) |
| 2 | 1 | $135,000.00 | $112,500.00 | $90,000.00 | $57,500.00 | $30,000.00 |
| 3 | 2 | $145,000.00 | $125,000.00 | $90,000.00 | $62,500.00 | $32,000.00 |
| 4 | 3 | $155,000.00 | $130,000.00 | $90,000.00 | $67,500.00 | $34,000.00 |
| 5 | 4 | $165,000.00 | $135,000.00 | $90,000.00 | $70,000.00 | $36,000.00 |
| 6 | 5 | $175,000.00 | $140,000.00 | $90,000.00 | $72,500.00 | $38,000.00 |
| NPV | $80,374.23 | $82,385.24 | $41,170.81 | $47,467.11 | $27,447.21 | |
| EXCEL FORMULA | A1+NPV(0.1,A2:A6) | B1+NPV(0.1,B2:B6) | C1+NPV(0.1,C2:C6) | D1+NPV(0.1,D2:D6) | E1+NPV(0.1,A2:A6) | |
| IRR | 15.83% | 17.47% | 15.24% | 18.53% | 19.80% | |
| EXCEL FORMULA | IRR(A1:A6) | IRR(B1:B6) | IRR(C1:C6) | IRR(D1:D6) | IRR(E1:E6) |
C. Based on NPV projects should be selected. Selecting Project B,D and E would give highest NPV
jeff jeffy answered 1 year agoRelated Solutions
A risk neutral firm (seeking to maximize expected profits) can choose between two mutually exclusive projects....
A risk neutral firm (seeking to maximize expected profits) can
choose
between two mutually exclusive projects. One project yields a
profit of
10 with certainty. The other project is risky, and yields a profit
of 40
and a loss of 10, each with 50 percent chance. The government
is
levying a tax on profits, denoted by 0<t<1. In case the firm
suffers from
losses (negative profits), the (negative) tax is neither refundable
nor can
the losses be carried forward and...
2. Given the following expected cash flows for two projects, and an opportunity cost of capital...
2. Given the following expected cash flows for two projects, and
an opportunity cost of capital of 10%, which project is better and
why? (10 points)
Expected Net Cash Flows
Year Project
A Project B
0
-$10,000
-$10,000
1
$5000
$0
2
$5000
$0
3
$5000
$8,000
4
$5000
$2,000
3. Given the following expected cash flows for two projects, and
an opportunity cost of capital of 8%, which project is better and
why? (10 points)
Expected Net...
Should a financial manager pursue projects whose expected returns are less than the firm’s weighted average...
Should a financial manager pursue projects whose expected
returns are less than the firm’s weighted average cost of capital
(WACC)? Explain your answer.
A new machine will cost $150,000 to place into operation. It is expected to have yearly...
A new machine will cost $150,000 to place into operation. It is
expected to have yearly cash flows of $50,000 for the first five
years. The company required rate of return is 9%.
1. Compute the Project's NPV.
2. Compute the Project's IRR.
3. How long is the project's payback period?
4. How long is the project's discounted payback period?
The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 12% cost of capital.
Expected Net Cash Flows
Year Project T Project F
0 ($100,000) ($100,000)
1 75,000 40,000
2 65,000 42,000
3 — 44,000
4 — 46,000
The projects provide a necessary service, so whichever one is selected is expected to be repeated into the foreseeable future. Both projects have a 12% cost of capital.
a. What is each project’s initial NPV without replication?
b. What is each project’s equivalent annual annuity?
c. Suppose you replicate Project T so...
You are the chief financial officer of a firm. The firm has an expected liability (cash...
You are the chief financial officer of a firm. The firm has an
expected liability (cash outflow) of $2 million in ten years at a
discount rate of 5%.
Calculate the amount the firm would need on the present date as
savings to cover the expected liability.
Calculate the amount the firm would need to set aside at the end
of each year for the next ten years to cover the expected
liability.
Explain the specific business decision that management...
You are a manager of a monopoly, and your demand and cost functions are given by...
You are a manager of a monopoly, and your demand and cost
functions are given by P =220 -2Q and C(Q) = 2000 + 10 Q2 What
Price maximizes your profit
You are the financial manager of a firm manufacturing headphones. You just announced that this year’s...
You are the financial manager of a firm manufacturing
headphones. You just announced that this year’s profits are $2
million. Analysts predict your profits will grow at 5% each year
for the next three years and then profit growth will slow to 3%per
year and will continue growing at 3%in perpetuity. Assuming an
opportunity cost of capital of 5%per year, what is the present
value of your future (not counting this year) projected profits?
what is the present of your...
You are the financial manager for a firm and the product development team has proposed the...
You are the financial manager for a firm and the product
development team has proposed the development of a software product
that will cost $1,000,000 currently to produce but will bring in
cashflows of $200,000 for the next 6 years. You know that the firm
can invest the firm’s retained earnings in the stock market and
earn 6% over the same period. Should you greenlight the development
of the new product or not? If you only expect to earn 5%...
Over the next three years, a firm is expected to earn economic profits of $60,000 in...
Over the next three years, a firm is expected to earn economic
profits of $60,000 in the first year, $50,000 in the second year,
and $20,000 in the third year. After the end of the third year, the
firm will go out of business. a. If the risk-adjusted discount rate
is 6 percent for each of the next three years, the value of the
firm is $________. The firm can be sold today for a price of
$________. b. If...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- PUT IN JAVA PROGRAMMING The StockB class: Design a class named StockB that contains the following...
- Draw a DFA for the following ( ∑ = {0,1}): Set of all strings with.
- In the article from Forbes notes that the goal of a leader is not to clone...
- Many people keep time using a 24 hour clock (11 is 11am and 23 is 11pm,...
- UNIX ONLY -- DIFFICULT LAB ASSIGNMENT This is an extremely difficult subject for me. Could you...
- Do you know why your credit card can be refused even though you are profitable?
- The Following Java expression: S/10 * 10 + 10 – S = C Show that this...
ADVERTISEMENT