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capital budgeting problems




capital budgeting problems;10.11;Long-term investment decision, NPV method Jenny Jenks has researched the financial;pros and cons of entering into a 1-year MBA program at her state university. The;tuition and books for the master?s program will have an up-front cost of $50,000. If;she enrolls in an MBA program, Jenny will quit her current job, which pays $50,000;per year after taxes (for simplicity, treat any lost earnings as part of the up-front;cost). On average, a person with an MBA degree earns an extra $20,000 per year (after;taxes) over a business career of 40 years. Jenny believes that her opportunity cost;of capital is 6%. Given her estimates, find the net present value (NPV) of entering;this MBA program. Are the benefits of further education worth the associated costs?;10.15;Internal rate of return Peace of Mind, Inc. (PMI), sells extended warranties for durable;consumer goods such as washing machines and refrigerators. When PMI sells an extended;warranty, it receives cash up front from the customer, but later PMI must cover any repair;costs that arise. An analyst working for PMI is considering a warranty for a new line;of big-screen TVs. A consumer who purchases the 2-year warranty will pay PMI $200.;On average, the repair costs that PMI must cover will average $106 for each of the warranty?s;2 years. If PMI has a cost of capital of 7%, should it offer this warranty for sale?;10.21;Nicholson Roofing Materials, Inc., is considering two mutually;exclusive projectseach with an initial investment of $150,000. The;company's boaed od directors has set a 4-year payback requirement and;has set its cost of capital at 9%. The cashinflows associated with the;two projects are as follows;cash inflows (CFt);year ProjectA ProjectB;1 $45,000 $75,000;2 45,000 60,000;3 45,000 30,000;4 45,000 30,000;5 45,000 30,000;6 45,000 30,000;a. Calculate the payback period for each project.;b. Calculate the NPV of each project at 0%;c. Calculate the NPV of each project at 9%;d. Derive the IRR of each project;e. Rank the projects by each of the techniques used. Make and justify;f. Go back one more time and calculate the NPV of each project using a cost of;capital of 12%. Does the ranking of the two projects change compared to your;answer in part e? Why?;10.24;All techniques?Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in the following table.;Cash flows Project A Project B Project C;Initial investment (CF0) $60,000 $100,000 $110,000;Cash inflows (CFt),t = 1 to 5 $20,000 $ 31,500 $ 32,500;a. Calculate the payback period for each project.;b. Calculate the net present value (NPV) of each project, assuming that the firm has a cost of capital equal to 13%.;c. Calculate the internal rate of return (IRR) for each project.;d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.;e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.


Paper#31248 | Written in 18-Jul-2015

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