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Please follow directions inside the attachments.. Must show all work
Week Four Individual Problems (
1
–8)
Note: To receive credit, show work on all problems (It can be shown as Excel or financial calculator inputs as well) on either this sheet or in Excel. For instance, if solving for the FV of $ 1
0
0 at 6% over
5
years, one could demonstrate by listing the following: PV = –
100
, N=5, I=6 and FV =1
3
3.8
2
(which would be the answer).
1)Carson Trucking is considering whether to expand its regional service center in Mohab, UT. The expansion requires the expenditure of $10,000,000 on new service equipment and would generate annual net cash inflows from reduced costs of operations equal to $2,
500
,000 per year for each of the next eight years. In year eight the firm will also get back a cash flow equal to the salvage value of the equipment which is valued at $1 million. Thus, in year eight the investment cash inflow totals $3,500,000. Calculate the project’s NPV using each of the following discount rates:
. 9%
a. 11%
b. 13%
c. 15%
2)Big Steve’s, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $100,000 and will generate net cash inflows of $18,000 per year for 10 years.
. What is the project’s NPV using a discount rate of 10%? Should
the project be accepted? Why or why not?
a. What is the project’s NPV using a discount rate of 15%? Should the project be accepted? Why or why not?
b. What is this project’s internal rate of return? Should the project be accepted? Why or why not?
3) Jella Cosmetics is considering a project that costs $800,000 and is expected to last for 10 years and produce future cash flows of $17
5,000
per year. What is the project’s IRR?
4
)Microwave Oven Programming, Inc. is considering the construction of a new plant. The plant will have an initial cash outlay of $7 million (CF0 = –$7 million), and will produce cash flows of $3 million at the end of year 1, $4 million at the end of year 2, and $2 million at the end of years 3 through 5. What is the internal rate of return on this new plant?
5)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 $1,950,000, and the project would generate cash flows of $450,000 per year for six years. The appropriate discount rate is 9 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?
6)The Callaway Cattle Company is considering the construction of a new feed handling system for its feed lot in Abilene, Kansas. The new system will provide annual labor savings and reduced waste totaling $
200
,000 while the initial investment is only $500,000. Callaway’s management has used a simple payback method for evaluating new investments in the past but plans to calculate the discounted payback to analyze the investment. Where the appropriate discount rate for this type of project is 10 percent, what is the project’s discounted payback period?
7) The Bar-None Manufacturing Co. manufactures fence panels used in cattle feed lots throughout the Midwest. Bar-None’s management is considering three investment projects for next year but doesn’t want to make any investment that requires more than three years to recover the firm’s initial investment. The cash flows for the three projects (
Project A
,
Project B
, and
Project C
) are found below: (SHOW WORK/CALCULATIONS TO DEMONSTRATE ANSWER RATIONALE)
|
Year |
Project A | Project B | Project C | ||
| 0 |
$( 1,000 ) |
$(10,000) |
$(5,000) |
||
| 1 |
600 |
5,000 | 1,000 | ||
| 2 |
300 |
3,000 |
|||
| 3 | 200 |
2,000 |
|||
| 4 | 100 | ||||
| 5 | 500 | ||||
a.Given Bar-None’s three-year payback period, which of the projects qualify for acceptance?
b.Rank the three projects using their payback period. Which project looks the best using this criterion?
c.If Bar-None uses a 10% discount rate to analyze projects, what is the discounted payback period for each of the three projects? If the firm still maintains its three-year payback policy for the discounted payback, which projects should the firm undertaken?
8)You are considering a project with an initial cash outlay of $80,000 and expected cash flows of $20,000 at the end of each year for six years. The discount rate for this project is 10%.
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?
All questions must be completed in one Excel document.
Redbird Capital Budgeting Project
First identify or calculate the capital spending, the operating cash flow, the change in net working capital, and finally the free cash flow to the firm of the project. It is these free cash flows that you find that are discounted at the weighted average cost of capital to calculate the net present value and the internal rate of return.
You will assess whether to make the investment or not. Use your accept-reject rules for the net present value and the internal rate of return.
Redbird, Inc. is considering an addition to its current operations. The figures are below.
|
Cost of the new project |
$1,700,000 |
|
|
Installation costs |
$100,000 |
|
|
Estimated unit sales in year 1 |
40,000 |
|
|
Estimated unit sales in year 2 |
65,000 |
|
|
Estimated unit sales in year 3 |
35,000 |
|
|
Estimated sales price in year 1 |
$200 |
|
|
Estimated sales price in year 2 |
||
|
Estimated sales price in year 3 |
$150 |
|
|
Variable cost per unit |
$130 |
|
|
Annual fixed cost |
$40,000 |
|
|
Initial working capital needed |
$60,000 |
|
|
Depreciation method |
3 years straight-line method, no salvage value |
|
|
Redbird’s tax rate |
40% |
|
|
Redbird’s cost of capital |
10% |
1. Calculate Operating Cash Flow and Free Cash Flow. Show your calculations in an Excel spreadsheet.
2. Determine the NPV and IRR of the project. Show your calculations in a Word document or an Excel spreadsheet.
