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Managerial Finance npv




Question;[i]. Real;Time Systems Inc. is considering the development of one of two mutually;exclusive new computer models. Each will require a net investment of $5,000.;The cash flow figures for each project are shown below;Period Project A Project B;1 $2,000 $3,000;2 2,500 2,600;3 2,250 2,900;Model B, which will use a new type of laser;disk drive, is considered a high-risk project, while Model A is of average;risk. Real Time adds 2 percentage points to arrive at a risk-adjusted cost of;capital when eval?uating a high-risk project. The cost of capital used for;average-risk projects is 12 percent. Which of the following statements;regarding the NPVs for Models A and B is most correct?;a. NPVA;= $380, NPVB = $1,815.;b. NPVA;= $197, NPVB = $1,590.;c. NPVA;= $380, NPVB = $1,590.;d. NPVA;= $5,380, NPVB = $6,590.;e. None;of the statements above is correct.;[ii]. Cochran;Corporation has a weighted average cost of capital of 11 percent for projects;of average risk. Projects of;below-average risk have a cost of capital of 9 percent, while projects of;above-average risk have a cost of capital equal to 13 percent. Projects A and B are mutually exclusive;whereas all other projects are independent.;None of the projects will be repeated.;The following table summarizes the cash flows, internal rate of return;(IRR), and risk of each of the projects.;Year (t);Project A;Project B;Project C;Project D;Project E;0;-$200,000;-$100,000;-$100,000;-$100,000;-$100,000;1;66,000;30,000;30,000;30,000;40,000;2;66,000;30,000;30,000;30,000;25,000;3;66,000;40,000;30,000;40,000;30,000;4;66,000;40,000;40,000;50,000;35,000;IRR;12.110%;14.038%;10.848%;16.636%;11.630%;Project Risk;Below Average;Below Average;Average;Above Average;Above Average;Which projects will the firm select for;investment?;a. Projects: A, B, C, D, E;b. Projects: B, C, D, E;c. Projects: B, D;d. Projects: A, D;e. Projects: B, C, D;Multiple;part;(The;following information applies to the next four problems.);[MACRS table required];The president of Real Time Inc. has asked;you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls;into the MACRS 3-year class. Purchase of;the computer would require an increase in net operating working capital of;$2,000. The computer would increase the;firm's before-tax revenues by $20,000 per year but would also increase;operating costs by $5,000 per year. The;computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent;and the project's cost of capital is 14 percent.;[iii]. What;is the net investment required at t = 0?;a. -$42,000;b. -$40,000;c. -$38,600;d. -$37,600;e. -$36,600;[iv]. What;is the operating cash flow in Year 2?;a. $;9,000;b. $10,240;c. $11,687;d. $13,453;e. $16,200;[v]. What;is the total value of the terminal year non-operating cash flows at the end of;Year 3?;a. $18,120;b. $19,000;c. $21,000;d. $25,000;e. $27,000;[vi]. What;is the project's NPV?;a. $2,622;b. $2,803;c. $2,917;d. $5,712;e. $6,438....


Paper#50984 | Written in 18-Jul-2015

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