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FIN534 Week 8 Homework Set 4




FIN534 Week 8 Homework Set 4;FIN534 Week 8 Homework Set 4;EXPECTED NET CASH FLOWS;Year Project A Project B;0?$400?$650;1?528 210;2?219 210;3?150 210;4 1,100 210;5 820 210;6 990 210;7?325 210;1. Construct NPV profiles for Projects A and B.;2. What is each project?s IRR?;3. If each project?s cost of capital were 10%, which project, if either, should be selected? If the cost;of capital were 17%, what would be the proper choice?;4. What is each project?s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as;the end of Project B?s life.);5. What is the crossover rate, and what is its significance?;The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for;a new manufacturing process;Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the;estimated salvage values. Porter?s cost of capital for an average-risk project is 10%.;Net After-Tax Cash Flows;Year P = 0.2 P = 0.6 P = 0.2;0?$100,000?$100,000?$100,000;1 20,000 30,000 40,000;2 20,000 30,000 40,000;3 20,000 30,000 40,000;4 20,000 30,000 40,000;5 20,000 30,000 40,000;5* 0 20,000 30,000;6. Assume that the project has average risk. Find the project?s expected NPV. (Hint: Use expected;values for the net cash flow in each year.);7. Find the best-case and worst-case NPVs. What is the probability of occurrence of the worst case;if the cash flows are perfectly dependent (perfectly positively correlated) over time?;8. Assume that all the cash flows are perfectly positively correlated. That is, assume there are only;three possible cash flow streams over time?the worst case, the most likely (or base) case, and;the best case?with respective probabilities of 0.2, 0.6, and 0.2. These cases are represented by;each of the columns in the table. Find the expected NPV, its standard deviation, and its;coefficient of variation for each probability.;Use the following information for Question 9;At year-end 2013, Wallace Landscaping?s total assets were $2.17 million and its accounts payable were;$560,000. Sales, which in 2013 were $3.5 million, are expected to increase by 35% in 2014. Total assets;and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically;uses no current liabilities other than accounts payable. Common stock amounted to $625,000 in 2013;and retained earnings were $395,000. Wallace has arranged to sell $195,000 of new common stock in;2014 to meet some of its financing needs. The remainder of its financing needs will be met by issuing;new long-term debt at the end of 2014. (Because the debt is added at the end of the year, there will be no;additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of;earnings will be paid out as dividends.;9. What were Wallace?s total long-term debt and total liabilities in 2013?


Paper#31222 | Written in 18-Jul-2015

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