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Corporate Finance Problem Set 6 with A+ ANSWERS




Question;Corporate;Finance;Problem Set 6;Suggestion: It may be easiest to transfer this entire;problem set to an Excel spreadsheet and solve the problems there;Use the following information for;questions 1 through 6.;A project has an initial cost of;$52,125, expected net cash inflows of $12,000 per year for 8 years and a cost;of capital of 12%.;10-1 What is the project?s NPV?;N;I;PV;PMT;FV;10-2 What is the project?s IRR?;N;I;PV;PMT;FV;10-3 What is the project?s MIRR;assuming that interim cash flows can be reinvested at a rate of 3%?;To Calculate Terminal Value;N;I;PV;PMT;FV;Taking the TV and calculating MIRR;N;I;PV;PMT;FV;10-4 What is the project?s profitability;index?;10-5;What is the project?s payback period?;10-6;What is the project?s discounted payback period?;10-7;Your division is considering two investment projects, each of which;requires an up front expenditures of $15 million. You estimate the investments will produce the;following cash flows;Year;Project;A;Project;B;1;5,000,000;20,000,000;2;10,000,000;10,000,000;3;20,000,000;6,000,000;What;are the two projects? net present values, assuming that the cost of;capital is 5%, 10% or 15%?;What;are the two projects? IRRs for these same cost of capital?;10-8;Edelman Engineering is considering including two pieces of equipment, a;truck and over and an overhead pulley system, in this year?s capital;budget. The projects are;independent. The cash outlay for the truck is $17,100 and that for the pulley;system is $22,430. The firm?s cost of;capital is 14%. Interim cash flows can;be reinvested at a rate of 3%. After-tax;cash flows including depreciation are as follows;Year;Truck;Pulley;0;(17100);(22430);1;5,100;7,500;2;5,100;7,500;3;5,100;7,500;4;5,100;7,500;5;5,100;7,500;Calculate the IRR, NPV and MIRR for each;project, and indicate the correct accept-reject decision for each;IRR;(Truck);N;I;PV;PMT;FV;NPV (Truck);N;I;PV;PMT;FV;Terminal Value;(Truck);N;I;PV;PMT;FV;MIRR (Truck);N;I;PV;PMT;FV;Pulley;IRR;(Pulley);N;I;PV;PMT;FV;NPV (Pulley);N;I;PV;PMT;FV;Terminal Value;(Pulley);N;I;PV;PMT;FV;MIRR (Pulley);N;I;PV;PMT;FV;10-9;Davis Industries must choose between a gas-powered and electric-powered fork;lift for moving materials in its factory. Since both forklifts perform the same;function the firm will choose only one. (The projects are mutually exclusive). The electric-powered truck will cost more;but it will be less expensive to operate, it will cost $22,000, whereas the gas-powered;truck will cost $17,500. The cost of;capital that applies to both investments is 12%. The life for both types of truck is estimated;to be 6 years, during which time the net cash flows for the electric-powered;truck will be $6290 per year and those with a gas-powered truck will be $5000;per year. Annual net cash flows include;depreciation expenses. Calculate the NPV;Profitability Index and IRR for each type of truck, and decide which to recommend.;NPV (Electric);N;I;PV;PMT;FV;Profitability Index;(Electric);IRR (Electric);N;I;PV;PMT;FV;NPV;(Gas);N;I;PV;PMT;FV;Profitability Index;(Gas);IRR (Gas);N;I;PV;PMT;FV;10-11 Your company is considering two;mutually exclusive projects, X and Y, whose costs and net cash flows are shown;below;Year;X;Y;0;(1000);(1000);1;100;1000;2;300;100;3;400;50;4;700;50;The Projects are equally risky, their;cost of capital is 12% and interim cash flow can be invested at 3%.;a) If the decision is based on which project has;the higher MIRR, what project would be selected?;b) If;the decision were based on Payback Period, which project would be chosen?;MIRR calculation for A;N;I;PV;PMT;FV;MIRR calculation for B;N;I;PV;PMT;FV;Payback A;Payback B;10-13;Cummings Products is considering two mutually exclusive investments whose;expected net cash flows are as follows;Year;Project A;Project B;0;(300);(405);1;(387);134;2;(193);134;3;(100);134;4;600;134;5;600;134;6;850;134;7;(180);0;a. Construct;NPV profiles for Project A and Project B;b. What;are the two projects? IRR?;c. If;you were told that each project?s cost capital was 10%, which project, if;either, should be selected? If the cost;of capital were 17%, what would be proper choice?;d. What;is the crossover rate, and what is its significance?;10-21 Your division is considering two;investment projects, each of which requires an up-front expenditure of $25;million. You estimate the cost of;capital is 10% and that the investments will produce following after-tax cash;flows(in millions of dollars);Year;Project A;Project B;0;(25);(25);1;5;20;2;10;10;3;15;8;4;20;6;a. What;is the payback period for each of the projects?;b. What;is the discounted payback period for each of the projects?;c. If;the two projects are independent and the cost of capital is 10%, which project;or projects should the firm undertake?;d. If;the two projects are mutually exclusive and the cost of capital is 5%, which;project should firm undertake?;e. If;the two projects are mutually exclusive and cost capital is 15%, which project;should the firm undertake?;f. What;is the crossover rate?;12-7 Upton Corporation makes all;purchases of small computers, stocks them at conveniently located warehouses;ships them to its chain of retail stores, and has a staff to advise customers;and help them set up their new computers. Upton?s balance sheet as of December;31, 2010 the shown here (millions of dollars);Cash;3.5;Accounts;Payable;9.0;Receivables;26.0;Notes;Payable;18.0;Inventories;58.0;Accruals;8.5;Total Current Assets;87.5;Total Current Liabilities;35.5;Net;Fixed Assets;35.0;Long;Term Debt;6.0;Common;Stock;15.0;Retained;Earnings;66.0;Total;Assets;122.5;Total Liabilities & Equity;122.5;Sales for 2010 were $350,000,000 and net;income for the year was $10.5 million, so the firm?s profit margin was 3.0%.;Upton paid dividends of $4.2 million to the common shareholders so its payout;ratio was 40%. Its tax rate is 40%., and;it operated at full capacity. Assume;that all assets/sales ratios, spontaneous liabilities/sales ratios, the profit;margin, and the payout ratio remain constant in 2011. Sales are projected to;increase to $70,000,000, or by 20%, during 2011. Assuming all existing;relationships remain constant;a. Calculate;the required assets that will be required to support the projected increase in;sales.;b. Calculate;the spontaneous liabilities that will arise with the increase in sales;c. Calculate;the AFN to determine Upton?s projected external capital requirements.;d. Use;the forecasted financial statement method to forecast Upton?s balance sheet for;December 31 2011. Assume that all;additional external capital is raised as a bank loan at the end of the year and;is reflected in notes payable (because the debt is added at the end of the;year, there will be no additional interest expense due to the new debt), assume;Upton?s profit margin and dividend payout ratio will be the same in 2011 as;they were in 2010. What is the amount of;the notes payable reported on 2011 forecasted balance sheet? (Hint: you don?t;need to forecast the income statements because you are given the projected;sales, profit margin, and dividend payout ratio, these figures allow you to;calculate 2011 addition to retained earnings for the balance sheet.)


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