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##### MBA570_Homework_3

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Question;Instructions: Either type or;write your answers directly on this document and submit the completed;assignment to your ESO. Show your work;for the calculations. If you use additional documents for the calculations;label them with your name and course number (MBA 570) and submit them as well.;Each question is worth 10 points.;1.;You;have been offered a very long-term investment opportunity. You can invest;$1,100 today and expect to receive $128,000 in 40 years. Your cost of capital;for this (very risky) opportunity is 16%.;a.;The;IRR of this investment opportunity is __________ %. (Round to one decimal place.);The IRR rule says that you __________. (Select;the best answer.);A.;should;not invest;B.;should;be indifferent;C.;should;invest;b.;The;NPV of this investment opportunity is __________ %. (Round to the nearest cent.);The NPV rule says that you __________. (Select;the best answer.);A.;should;not invest;B.;should;be indifferent;C.;should;invest;2.;You;are a real estate agent thinking of placing a sign advertising your services at;a local bus stop. The sign will cost $10,000 and will be posted for one year.;You expect that it will generate additional revenue of $1,900 a month. The;payback period is __________ months. (Round;to two decimal places.);3.;You;are considering making a movie. The movie is expected to cost $10.5 million;upfront and take a year to make $4.9 million in the year it is released (end of;year 2) and $1.7 million for the following four years (end of years 3 through;6).;a.;The;payback period of this investment is __________ years. (Round up to nearest integer.);b.;If;you require a payback period of two years, would you make this movie? (Enter yes or no.);c.;If;the cost of capital is 10.3%, the NPV is $__________ million. (Round to two decimal places.);4.;AOL;is considering two proposals to overhaul its network infrastructure. They have;two bids. The first bid from Huawei will require a $15 million upfront;investment and will generate $20 million in savings for AOL each year for the;next three years. The second bid from Cisco requires an $81 million upfront;investment and will generate $60 million in savings each year for the next;three years.;a.;What;is the IRR for AOL associated with;each bid?;The IRR;associated with the bid from Huawei is __________ %. (Round to one decimal place.);The IRR associated with the bid from Cisco;is __________ %. (Round to one decimal;place.);b.;If;the cost of capital for this investment is 14%, what is the NPV for each bid?;The NPV for Huawei?s bid is $__________ million.;(Round to two decimal places.);The NPV for Cisco?s bid is $;million. (Round to two decimal places.);c.;Suppose;Cisco modifies its bid by offering a lease contract instead. Under the terms of;the lease, AOL will pay $26 million upfront, and $35 million per year for the;next three years. AOL?s savings will be the same as with Cisco?s original bid.;The IRR of the Cisco bid is now;%. (Round to one decimal;place.);The new NPV is $__________ million. (Round to two decimal places.);d.;AOL;should;A. choose Huawei.;B. choose Cisco without lease.;C. choose Cisco with lease.;D. take none of the bids.;5.;Natasha?s;Flowers, a local florist, purchases fresh flowers each day at the local flower;market. The buyer has a budget of $1,000 per day to spend. Different flowers;have different profit margins, and also a maximum amount the shop can sell.;Based on past experience the shop has estimated the following NPV for;purchasing each type;NPV per bunch;Cost per bunch;Max. bunches;Roses;$2;$20;25;Lilies;$10;$29;10;Pansies;$6;$30;10;Orchids;$21;$80;5;(Select based on;descending order of their profitability-index values. Round the investment;amounts to the nearest integer.);The;combination of flowers Natasha?s Flowers should purchase each day is (select one of the three for each);$;of (roses, pansies, lilies) Select one of;the three.;$;of (orchids, pansies, lilies) Select one;of the three.;$;of (lilies, orchids, pansies) Select one;of the three.;6.;Pisa;Pizza, a seller of frozen pizza, is considering introducing a healthier version;of its pizza that will be low in cholesterol and contain no trans fats. The;firm expects that sales of the new pizza will be $21 million per year. While;many of these sales will be to new customers, Pisa Pizza estimates that 46%;will come from customers who switch to the new, healthier pizza instead of;buying the original version.;a.;Assuming;customers will spend the same amount on either version, the incremental sales;associated with introducing the new pizza are $__________ million. (Round to the nearest integer.);b.;Suppose;that 59% of the customers who will switch from Pisa Pizza?s original to its;healthier pizza will switch to another brand if Pisa Pizza does not introduce a;healthier pizza. In this case, the incremental sales associated with;introducing the new pizza are $__________ million. (Round to the nearest integer.);7.;Cellular;Access Inc. is a cellular telephone service provider that reported net;operating profit after tax (NOPAT) of $259 million for the most recent fiscal;year. The firm had depreciation expenses of $128 million, capital expenditures;of $152 million, and no interest expenses. Working capital increased by $12;million. The free cash flow for Cellular Access for the most recent fiscal year;is $__________ million. (Round to the;nearest million.);8.;Castle;View Games would like to invest in a division to develop software for video;games. To evaluate this decision, the firm first attempts to project the;working capital needs for its operation. Its chief financial officer has;developed the following estimates (in millions of dollars);Year 1;Year 2;Year 3;Year 4;Year 5;Cash;7;12;14;15;16;Accounts;receivable;18;22;23;22;25;Inventory;4;9;10;12;16;Accounts;payable;16;19;25;28;32;Assuming that Castle View currently does not have any working capital invested;in this division, calculate the cash flows associated with the changes in;working capital for the first five years of this investment. (Note: Enter decreases as negative numbers.);a.;The;change in working capital for year 1 is $__________ million. (Round to the nearest million.);b.;The;change in working capital for year 2 is $__________ million. (Round to the nearest million.);c.;The;change in working capital for year 3 is $__________ million. (Round to the nearest million.);d.;The;change in working capital for year 4 is $__________ million. (Round to the nearest million.);e.;The;change in working capital for year 5 is $__________ million. (Round to the nearest million.);9.;Markov;Manufacturing recently spent $12 million to purchase some equipment used in the;manufacturing of disk drives. The firm expects that this equipment will have a;useful life of five years, and its marginal corporate tax rate is 39%. The;company plans to use straight-line depreciation.;a.;The;annual depreciation expense associated with this equipment is $__________ million.;(Round to two decimal places.);b.;The;annual depreciation tax shield is $__________ million. (Round to two decimal places.);c.;Rather;than straight-line depreciation, suppose Markov will use the MACRS depreciation;for five-year property. Calculate the depreciation tax shield each year for;this equipment under the following accelerated depreciation schedule;MACRS;Depreciation Table;Year;5 Years;1;20.00%;2;32.00%;3;19.20%;4;11.52%;5;11.52%;6;5.76%;The depreciation tax shield for year 0;is $__________ million. (Round to two;decimal places.);The depreciation tax shield for year 1;is $__________ million. (Round to two decimal;places.);The depreciation tax shield for year 2;is $__________ million. (Round to two;decimal places.);The depreciation tax shield for year 3;is $__________ million. (Round to two;decimal places.);The depreciation tax shield for year 4;is $__________ million. (Round to two;decimal places.);The depreciation tax shield for year 5;is $__________ million. (Round to two;decimal places.);d.;If;Markov has a choice between straight-line and MACRS depreciation schedules, and;its marginal corporate tax rate is expected to remain constant, which should it;choose? Why?;A.;With;MACRS, the firm receives the depreciation tax shields sooner, thus, MACRS leads;to a higher NPV of Markov?s FCF.;B.;With;straight-line depreciation, the firm?s depreciation expenses are lower;initially, leading to higher earnings, thus, straight-line depreciation leads;to a higher NPV of Markov?s FCF.;C.;With;either method, the total depreciation tax shield is the same, therefore, it does;not matter which method is used.;D.;None;of the above.;e.;How;might your answer to part (d) change if Markov anticipates that its marginal;corporate tax will change substantially over the next five years?;A.;Markov;may be better off using the straight-line method if it expects its tax rate to;decrease substantially in later years.;B.;Markov;may be better off using the straight-line method if it expects its tax rate to;increase substantially in later years.;C.;Even;if its tax rate is expected to change, Markov is better off using MACRS;depreciation rather than straight-line depreciation.;D.;None;of the above.;10.;Bauer;Industries is an automobile manufacturer. Management is currently evaluating a;proposal to build a plant that will manufacture lightweight trucks. Bauer plans;to use a cost of capital of 12% to evaluate this project. Based on extensive;research, it has prepared the following free cash flow projections (in millions;of dollars);Free Cash Flow;Year 0;Years 1-9;Year 10;Revenues;100.00;100.00;? Manufacturing expenses (other than;depreciation);? 32.00;? 32.00;? Marketing expenses;? 8.00;? 8.00;? Depreciation;? 14.00;? 14.00;=;EBIT;45.60;45.60;? Taxes (35%);? 15.96;? 15.96;=;Unlevered net income;29.64;29.64;+;Depreciation;? Increases in net working capital;? 5.00;? 5.00;? Capital expenditures;? 144.00;+;Continuation value;12.00;=;Free cash flow;? 144.00;39.04;51.04;a.;For;this base case scenario, the NPV of the plant to manufacture lightweight trucks;is $__________ million. (Round to two;decimal places.);b.;Based;on input from the marketing department, Bauer is uncertain about its revenue;forecast. In particular, management would like to examine the sensitivity of;the NPV to the revenue assumptions.;The NPV of this project if revenues are 10% higher than forecast is;$__________. (Round to two decimal places.);The NPV of this project if revenues are 10% lower than forecast is;$__________. (Round to two decimal places.)

Paper#48068 | Written in 18-Jul-2015

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