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##### FIN370 NPV Calculation

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Question;1.);(Net present value calculation) Big Steve?s;makers of swizzle sticks, is considering the purchase of a new plastic stamping;machine. This investment requires an initial outlay of $105, 000 and will;generate net cash inflows of $21,000 per year for 8 years.;a.;What is;the project?s NPV using a discount rate of 8 percent? Should the project be;accepted? Why or Why not?;b.;What is the project?s NPV using a discount rate;of 14 percent? Should the project be accepted? Why or Why not?;c.;What is this project?s internal rate of return?;Should the project be accepted? Why or Why not?;a.;If the discount rate is 8 percent, then the;project?s NPV is $_____________(Round to the nearest dollar.);2.);(IRR;calculation) What is the internal rate of return for the following project: An;initial outlay of $9,000 resulting in a single cash inflow of $17, 538 in 7 years?;The internal rate of return for the;project is _________% (Round to the nearest whole percent.);3.);(NPV and IRR calculation) East Coast Television;is considering a project with an initial outlay of $X (you will have to;determine this amount). It is expected that the project will produce a positive;cash flow of $60,000 a year at the end of each year for the next 13 years. The;appropriate discount rate for this project is 9 percent. If the project has an;internal rate of return of 14 percent, what is the project?s net present value?;a.;If the project has internal rate of 12%, then;the project?s initial outlay is $___________(Round to the;nearest cent.);4.);(IRR and NPV calculation) The cash flows for;three independent projects are found below.;PROJECT A PROJECT;B PROJECT C;YEAR 0;(INITIAL INVESTMENT) $(65,000);$(110,000);$(420,000);Year 1;$9,000 $27,000 $220,000;YEAR 2;16,000;$27,000;$220,000;YEAR 3;23,000 27,000 $220,000;YEAR 4;28,000;27,000;Year 5;32,000;27,000;a.;Calculate;the IRR for each of the projects;b.;If the discount rate for all three projects is;15 percent, which projects or projects would you want to undertake?;c.;What is the net present value of each of the;projects where the appropriate rate is 15 percent?;a.;The IRR of Project A is ________% (ROUND TO TWO;DECIMALS.);5. (IRR of an uneven cash flow;stream) Microwave Oven Programming, Inc. is considering the construction of a;new plant. The plant will have an initial cash outlay of $6.5 million (=-$6.5;million), and will produce a cash flow of $2.4 million at the end of year 1;$4.2 million at the end of year 2, and $1.8 million at the end of years 3;through 5. What is the internal rate of return on this new plant?;The IRR of the project is _________% (Round to two decimal;places.);6. (NPV, PI, and IRR;calculations) Fijisawa, Inc. is considering a major expansion of its product;line and has estimated the following cash flows associated with such an;expansion. The initial outlay would be $2,040,000 and the project would;generate cash flows of$500,000 per years. The appropriate discount rate is 10.6;percent.;a. Calculate the net present value.;b. Calculate the profitability index;c. Calculate the internal rate of return.;d. Should this project be;accepted? Why or why not?;a. The NPV of the expansion is $___________(Round to the;nearest dollar.);7. (Payback period, net present value, profitability index;and internal rate or return calculations) You are considering a project with an;initial cash outlay of $71,000 and expected cash flows of $19,880 at the end of;each year for six years. The discount rate for this project is 9.6 percent.;a.;What are the project?s payback and discounted;payback periods?;b.;What is the project?s NPV?;c.;What is the project?s PI?;d.;What is the project?s IRR?;a.;The payback period of the project is;years. (Round to two decimal places.);8. (Calculating operation cash flows) Assume;that a new project will annually generate revenues of $2,200,000 and cash;expenses (including both fixed and variable costs) of $1,050,000, while;increasing depreciation by $240,000 per year. In addition, the firm?s tax rate;is 29 percent. Calculate the operating cash flows for the new project.;The firm?s operating cash flows are $_____________(Round to;the nearest dollar.);9. (Calculating;project cash flows and NPV) You are considering expanding your product line;that currently consists of skateboards to include gas powered skateboards, and;you feel expanding your product line that currently consists of skateboards to;include gas powered skateboards, and you feel you can sell 7,000 of these per;year for 10 years (after which time this project is expected to shut down with;solar-powered skateboards taking over). The gas skateboards would sell for $70;each with variable of costs of $50 for each one produced, and annual fixed;costs associated with production would be $190,000. In additions there would be;a $1,200,000 initial expenditure associated with the purchase of new production;equipment. It is assumed that this initial expenditure will be depreciated using;the simplified straight-line method down to zero over 10 years. The project;will also require a one-time initial investment of $30,000 in net working;capital associated with inventory, and this working capital investment will be;recovered when the project is shut down. Finally, assume that the firm?s;marginal tax rate is 37 percent.;a. What is the initial cash outlay associated with this;project?;b. What are the annual net cash flows associated with this;project for years 1 through 9?;c. What is the terminal cash flow in year 10 (that is, what;is the free cash flow in year 10 plus any additional cash flows associated with;termination of the project)?;d. What is the project?s NPV;given a required rate of return of 7 percent?;a. The initial cash outlay associated with this project is;$_________________. (Round to the nearest dollar.);10. (Inflation and project cash flows) Carlyle;Chemicals is evaluating a new chemical compound used in the manufacture of a;wide range of consumer products. The firm is concerned that inflation in the;cost of raw materials will have an adverse effect on the project?s flows.;Specifically, the firm expects the cost per unit (which is currently $0.88);will rise at a rate of 13 percent annually over the next three years. The;per-unit selling price is currently $.096 and this price is expected to rise at;a merger 4 percent annual rate over the next three years. If Carlyle expects to;sell 5.5, 7.5, and 9.5 million units for the next three years, respectively;what is your estimate of the gross profits to the firm? Based on these;estimates, what recommendation would you offer to the firm?s management with;regard to this product? (Note: Be sure to round each unit price and unit cost;per year to the nearest cent.);The gross profit or (loss) for year 1 is $____________.;(Round to the nearest dollar.);11. (Calculating the expected NPV of a project) Management;at the Doctors Bone and Joint Clinic is considering whether to purchase a newly;developed MRI machine which they feel will provide the basis for better;diagnoses of foot and knee problems. The new machine is quite expensive and;will be used for a number of years. The clinic?s CFO asked an analyst to work;up estimates of the NPV of the investment under three different assumptions;about the level of demand for its use (high, medium, and low). The CFO assigned;a 50 percent probability to the medium-demand state, a 30 percent probability;to the high state, and the remaining 20 percent to the low state. After making;forecasts of the demand for the machine based on the CFO?s judgment and past;utilization rates for MRI scans, the following NPV estimates were made;Demand State;Probability of State NPV Estimate;Low;20% $(300,000);Medium;50%;$200,000;High;30%;$400,000;a.;What is the expected NPV for the MRI machine;based on the above estimates? How would you interpret the meaning of the;expected NPV? Does this look like a good investment to you?;b.;Assuming that the probability of the;medium-demand state remains 50 percent, calculate the maximum probability you;can assign to the low-demand state and still have an expected NPV of 0 or;higher. (Hint:The sum of the;probabilities assigned to all three states must be 100 percent.);a.;The expected NPV for the MRI machine is;$___________. (Round to the nearest dollar.);12. (Scenario;analysis) Family Security is considering introducing tiny GPS trackers that can;be inserted in the sole of a child?s shoe which would then allow for the;tracking of that child if he or she was ever lost or abducted. The estimates;that might be off by 10 percent (either above or below), associated with this;new product are shown here;Data Table;Unit price: $125;Variable costs: $75;Fixed costs: $250,000 per year.;Since this is a new product line, you are not confident in your estimates and;would like to know how well you will fare if your estimates on the items listed;above are 10 percent lower than expected. Assume that this new product line;will require an initial outlay of $1.00;million, with no working capital investment, and will last for 10 years;being depreciated down to zero using straight-line depreciation. In addition;the firm?s required rate to return or cost of capital is 10.0 percent, and the;firm?s marginal tax rate is 34 percent. Calculate the project?s NPV under the;?best-case scenario? (that is, use the high estimates-unit price 10 percent;above expected, variable costs 10 percent less than expected, fixed costs 10;percent less than expected, and expected sales 10 percent more than expected).;Calculate the project?s NPV under the ?worst-case scenario.?;The NPV for the best-case scenario will be;$_________________. (Round to the nearest dollar.);13. (Real options and capital budgeting) You are considering;introducing a new Tex-Mex-Thai fusion restaurant. The initial outlay on this;new restaurant is $6.4 million and the present value of the free cash flows;(excluding the initial outlay) is $5.3 million, such that the project has a;negative expected NPV of $1.1 million. Upon closer examination, you find that;there is a 55 percent chance that this new restaurant will be well received and;will produce annual cash flows of $818, 000 per year forever (a perpetuity);while there is a 45 percent chance of it producing a cash flow of only $206,000;per year forever, (a perpetuity) if it isn?t well. The required rate of return;you use to discount the project cash flows is 10.3 percent. However, if the new;restaurant is successful, you will be able to build 15 more of them and they;will have costs and cash flows similar to the successful restaurant?s costs and;cash flows.;a.;In spite of the fact that the first restaurant;has a negative NPV, should you build it anyway? Why or Why not?;b.;What is the expected NPV for this project if;only one restaurant is built but isn?t well received? What is expected NPV for;this project assuming 15 more are built if the first restaurant is well;received? (Ignore the fact that there would be a time delay in building;additional new restaurants;a.;In spite of the fact that the first has a;negative NPV, should you build it anyway? Why or Why not? (Select the best;choice below.;A.;The;company should not open the first restaurant, because if the company does not;open the first restaurant it will never know whether this type of restaurant;will be successful.;B.;The company should open the first restaurant;because the company has nothing to lose should the concept fail.;C.;The company should not open the first;restaurant, because companies should never undertake risky investments.;14. (Identifying spontaneous, temporary;and permanent sources of financing) Classify each of the following sources of;new financing as a spontaneous, temporary, or permanent;a.;A manufacturing firm enters into a loan;agreement with its bank that calls for annual principal and interest?s payments;spread over the next four years.;b.;A retail firm orders new items of inventory that;are charged to the firm?s trade credit.;c.;A trucking firm issues common stock to the;public and used the proceeds to upgrade its tractor fleet.;a.;A manufacturing firm enters into a loan;agreement with its bank that calls for annual principal and interest?s payments;spread over the next four years.;This source of financing can be classified as a (Spontaneous Financing, Temporary Financing;or Permanent financing).;15. (Evaluating trade credit discounts) IF a firm;buys on trade credit terms of 5/15, net 30 and decides to forgo the trade;credit discount and pay on the net day, what is the annualized costs of;forgoing the discount (assume a 360-day year)?;The annualized costs of the trade credit terms of 5/15, net;30 is __________% (Round to two decimal places.)

Paper#48121 | Written in 18-Jul-2015

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