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Two Accounting Questions




Question;Lakonishok Equipment has an investment opportunity in Europe. The project costs ?15 million and is expected to produce cash flows of ?2.9 million in Year 1, ?3.5 million in Year 2, and ?4.0 million in Year 3. The current spot exchange rate is $1.44/?, the current risk-free rate in the United States is 3.0 percent, compared to that in Europe of 2.5 percent. The appropriate discount rate for the project is estimated to be 12 percent, the U.S. cost of capital for the company. In addition, the subsidiary can be sold at the end of three years for an estimated ?9.9 million.What is the NPV of the project? (Enter your answer in thousands of dollars, not in millions. (e.g., 1,234,567). Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))______________________________________Grosvenor Industries has designated $1.2 million for capital investment expenditures during the upcoming year. Its cost of capital is 14 percent. Any unused funds will earn the cost of capital rate. The following investment opportunities along with their required investment and estimated net present values have been identified:Project Net Investment NPV Project Net Investment NPVA $200,000 $22,000 F $250,000 $30,000B 275,000 21,000 G 100,000 7,000C 150,000 6,000 H 200,000 18,000D 190,000 (19,000) I 210,000 4,000E 500,000 40,000 J 250,000 35,000In your response, complete the following:1. Rank the projects using the profitability index. Considering the limit on funds available, which projects should be accepted?2. Using the NPV, which projects should be accepted, considering the limit on funds available?3. If the available investment funds are reduced to only $1,000,000:(a) Does the list of accepted projects change from Part 2?(b) What is the opportunity cost of the eliminated $200,000


Paper#38977 | Written in 18-Jul-2015

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