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Question;13. Aerospace Dynamics will invest $110,000 in a;project that will produce the following cash flows. The cost of capital is 11;percent. Should the project be undertaken? (Note that the fourth year?s cash;flow is negative.);Year;Cash Flow;1................;$36,000;2................;44,000;3................;38,000;4................;(44,000);5................;81,000;14. The Horizon Company will invest $60,000 in a;temporary project that will generate the following cash inflows for the next;three years.;Year;Cash Flow;1................;$15,000;2................;25,000;3................;40,000;The;firm will also be required to spend $10,000 to close down the project at the;end of the three years. If the cost of capital is 10 percent, should the;investment be undertaken?;15. Skyline Corp. will invest $130,000 in a;project that will not begin to produce returns until after the 3rd year. From;the end of the 3rd year until the end of the 12th year (10 periods), the annual;cash flow will be $34,000. If the cost of capital is 12 percent, should this;project be undertaken?;16. The Ogden Corporation makes an investment of;$25,000, which yields the following;cash flows;Year;Cash Flow;1................;$ 5,000;2................;5,000;3................;8,000;4................;9,000;5................;10,000;a. What is the present value with a 9 percent;discount rate (cost of capital)?;b. What is the internal rate of return? Use;the interpolation procedure shown in this chapter.;c. In this problem would you make the same;decision in parts a and b;17. The Danforth Tire Company is considering the;purchase of a new machine that would increase the speed of manufacturing and;save money. The net cost of this machine is $66,000. The annual cash flows have;the following projections.;Year;Cash Flow;1................;$21,000;2................;29,000;3................;36,000;4................;16,000;5................;8,000;a. If the cost of capital is 10 percent, what;is the net present value?;b. What is the internal rate of return?;c. Should the project be accepted? Why?;18. You are asked to evaluate two projects for;Adventures Club, Inc. Using the net present value method combined with the;profitability index approach described in footnote 2 on page ____, which project;would you select? Use a discount rate of 12 percent.;Project X (trips to Disneyland);($10,000 investment);Project Y (international film festivals);($22,000 investment);Year;Cash Flow;Year;Cash Flow;1..............................;$4,000;1.................................;$10,800;2..............................;5,000;2.................................;9,600;3..............................;4,200;3.................................;6,000;4..............................;3,600;4.................................;7,000;19. Cablevision, Inc., will invest $48,000 in a;project. The firm?s discount rate (cost of capital) is 9 percent. The;investment will provide the following inflows.;1................;$10,000;2................;10,000;3................;16,000;4................;19,000;5................;20,000;The internal rate of return is 15 percent.;a. If the reinvestment assumption of the net;present value method is used, what will be the total value of the inflows after;five years? (Assume the inflows come at the end of each year.);b. If the reinvestment assumption of the;internal rate of return method is used, what will be the total value of the;inflows after five years?;c. Generally is one investment assumption;likely to be better than another?;20. The 21st Century Corporation uses the;modified internal rate of return. The firm has a cost of capital of 8 percent.;The project being analyzed is as follows ($20,000 investment);Year;Cash Flow;1................;$10,000;2................;9,000;3................;6,800;a. What is the modified internal rate of;return? An approximation from Appendix B is adequate. (You do not need to;interpolate.);b. Assume the traditional internal rate of;return on the investment is 14.9 percent. Explain why your answer in part a would be lower.;21. Oliver Stone and Rock Company uses a process;of capital rationing in its decision making. The firm?s cost of capital is 12;percent. It will invest only $80,000 this year. It has determined the internal;rate of return for each of the following projects.;Project;Project Size;Percent of Internal Rate of Return;A.........................;$15,000;14%;B..........................;25,000;19;C..........................;30,000;10;D.........................;25,000;16.5;E..........................;20,000;21;F..........................;15,000;11;G.........................;25,000;18;H.........................;10,000;17.5;a. Pick out the projects that the firm should;accept.;b. If Projects B and G are mutually;exclusive, how would that affect your overall answer? That is, which projects;would you accept in spending the $80,000?;22. Miller Electronics is considering two new;investments. Project C calls for the purchase of a coolant recovery system.;Project H represents an investment in a heat recovery system.;The firm wishes to use a net present value profile in comparing the projects.;The investment and cash flow patterns are as follows;Project C ($25,000 Investment);Project H ($25,000 investment);Year;Cash Flow;Year;Cash Flow;1..........................;$ 6,000;1...............................;$20,000;2..........................;7,000;2...............................;6,000;3..........................;9,000;3...............................;5,000;4..........................;13,000;a. Determine the net present value of the;projects based on a zero discount rate.;b. Determine the net present value of the;projects based on a 9 percent discount rate.;c. The internal rate of return on Project C;is 13.01 percent, and the internal rate of return on Project H is 15.68;percent. Graph a net present value profile for the two investments similar to;Figure 12-3. (Use a scale up to $10,000 on the vertical axis, with $2,000;increments. Use a scale up to 20 percent on the horizontal axis, with;5 percent increments.);d. If the two projects are not mutually;exclusive, what would your acceptance or rejection decision be if the cost of;capital (discount rate) is 8 percent? (Use the net present value profile for;your decision, no actual numbers are necessary.);e. If the two projects are mutually exclusive;(the selection of one precludes the selection of the other), what would be your;decision if the cost of capital is (1) 5 percent;(2) 13 percent, (3) 19 percent? Use the net present value profile for your;answer.;23. Software Systems is considering an;investment of $20,000, which produces the following inflows;Year;Cash Flow;1................;$11,000;2................;9,000;3................;5,800;You;are going to use the net present value profile to approximate the value for the;internal rate of return. Please follow these steps;a. Determine the net present value of the;project based on a zero discount rate.;b. Determine the net present value of the;project based on a 10 percent discount rate.;c. Determine the net present value of the;project based on a 20 percent discount rate;(it will be negative).;d. Draw a net present value profile for the;investment. (Use a scale up to $6,000 on the vertical axis, with $2,000;increments. Use a scale up to 20 percent on the horizontal axis, with 5 percent;increments.) Observe the discount rate at which the net present value is zero.;This is an approximation of the internal rate of return on the project.;e. Actually compute the internal rate of;return based on the interpolation procedure presented in this chapter. Compare;your answers in parts d and e.;24. Howell Magnetics Corporation is going to;purchase an asset for $400,000 that will produce $180,000 per year for the next;four years in earnings before depreciation and taxes. The asset will be;depreciated using the three-year MACRS depreciation schedule in Table 12-9.;(This represents four years of depreciation based on the half-year convention.);The firm is in a 34 percent tax bracket. Fill in the schedule below for the;next four years. (You need to first determine annual depreciation.);Earnings;before depreciation and taxes;Depreciation;Earnings before taxes;Taxes;Earnings after taxes;+ Depreciation;Cash;flow;25. Assume $80,000 is going to be invested in;each of the following assets. Using Tables 12-8 and 12-9, indicate the dollar;amount of the first year?s depreciation.;a. Computers;b. Petroleum refining product;c. Office furniture;d. Pipeline distribution;26. The Keystone Corporation will purchase an;asset that qualifies for three-year MACRS depreciation. The cost is $60,000 and;the asset will provide the following stream of earnings before depreciation and;taxes for the next four years;Year 1.................. $27,000;Year 2.................. 30,000;Year 3.................. 23,000;Year 4.................. 15,000;The firm is in a 36;percent tax bracket and has an 11 percent cost of capital. Should it purchase;the asset?;27. Oregon Forest Products will acquire new;equipment that falls under the five-year MACRS category. The cost is $300,000.;If the equipment is purchased, the following earnings before depreciation and;taxes will be generated for the next six years.;Year 1..................... $112,000;Year 2..................... 105,000;Year 3..................... 82,000;Year 4..................... 53,000;Year 5..................... 37,000;Year 6..................... 32,000;The firm is in a 30;percent tax bracket and has a 14 percent cost of capital. Should Oregon Forest;Products purchase the equipment? Use the net present value method.;28. The Thorpe Corporation is considering the;purchase of manufacturing equipment with a 10-year midpoint in its asset;depreciation range (ADR). Carefully refer to Table 12-8 to determine in what;depreciation category the asset falls. (Hint: It is not 10 years.) The asset;will cost $80,000, and it will produce earnings before depreciation and taxes;of $28,000 per year for three years, and then $12,000 a year for seven more;years. The firm has a tax rate of 34 percent. With a cost of capital of 12;percent, should it purchase the asset? Use the net present value method. In;doing your analysis, if you have years in which there is no depreciation;merely enter a zero for depreciation.

 

Paper#45461 | Written in 18-Jul-2015

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