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essentials managerial finance
Principles Of Managerial Finance 15th Global Edition Chad J. Zutter, Scott Smart - Solutions
=+f. Go back one more time and calculate the NPV of each project using a cost of capital of 12%. Does the ranking of the two projects change compared to your answer in part e? Why?
=+P10–22 Payback, NPV, and IRR Woolworths Ltd. is evaluating the feasibility of investing A$1,000,000 in a new store in Sydney, having a 5-year life. The firm has estimated the cash inflows from the proposed store, as shown in the following table. The firm has an 8% cost of capital.LG 4 Year (t)
=+a. Calculate the payback period for the proposed investment.
=+b. Calculate the net present value (NPV) for the proposed investment.
=+c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent, for the proposed investment.
=+d. Evaluate the acceptability of investing in the store using NPV and IRR. What recommendation would you make relative to the implementation of the project? Why?
=+LG 3 LG 4 P10–23 NPV, IRR, and NPV profiles Thomas Company is considering two mutually exclusive projects. The firm, which has a 12% cost of capital, has estimated its cash flows as shown in the following table.
=+a. Calculate the NPV of each project, and assess its acceptability.
=+b. Calculate the IRR for each project, and assess its acceptability.
=+c. Draw the NPV profiles for both projects on the same set of axes.
=+d. Evaluate and discuss the rankings of the two projects on the basis of your findings in partsa, b, and c.
=+e. Explain your findings in part d in light of the pattern of cash inflows associated with each project.
=+LG 2 LG 3 P10–24 All techniques: Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in the following table.
=+a. Calculate the payback period for each project.
=+b. Calculate the net present value (NPV) of each project, assuming that the firm has
=+a cost of capital equal to 13%.
=+c. Calculate the internal rate of return (IRR) for each project.
=+d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
=+e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.
=+LG 2 LG 3 P10–25 All techniques with NPV profile: Mutually exclusive projects Apart from opening a new store in Sydney, as described in Problem 10-22, Woolworths Ltd. is also considering opening a store in Canberra. Like the Sydney store, this store will have the same initial cost of
=+a. Calculate the payback period for each proposed store.
=+b. Calculate the net present value (NPV) for each proposed store.
=+c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent, for each proposed store.
=+d. Draw the net present value profiles for each store on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
=+e. Evaluate the acceptability of each proposed store dictated by each measure, and indicate which project you would recommend. Explain why.
=+LG 4 LG 5 LG 6 Cash inflows (CFt)Year (t) Sydney Canberra 1 A$100,000 A$250,000 2 200,000 250,000 3 300,000 250,000 4 400,000 250,000 5 500,000 250,000
=+P10–26 Integrative: Multiple IRRs BP is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following table.Year Cash flow 0 £3,100,000 1 -4,000,000 2 1,000,000 3 -3,100,000 4 3,000,000
=+a. Why is it difficult to calculate the payback period for this project?
=+b. Calculate the investment’s net present value (NPV) at each of the following discount rates: 0%, 5%, 10%, 15%, 20%, 25%, 30%, and 35%.
=+c. What does your answer to part b tell you about this project’s IRR?
=+d. Should BP invest in this project if its cost of capital is 6%? What if the cost of capital is 12%?
=+e. In general, when faced with investment projects like this one, how should a firm decide whether to invest in the project or reject it?
=+P10–27 Integrative: Conflicting Rankings The High-Flying Growth Company (HFGC) has been expanding very rapidly in recent years, making its shareholders rich in the process. The average annual rate of return on the stock in the past few years has been 20%, and HFGC managers believe that 20% is a
=+a. Calculate the NPV, IRR, and PI for both projects.b. Rank the projects based on their NPVs, IRRs, and PIs.
=+c. Do the rankings in part b agree or not? If not, why not?
=+d. The firm can afford to undertake only one of these investments, and the CEO favors the product introduction because it offers a higher rate of return (i.e., a higher IRR) than the plant expansion. What do you think the firm should do? Why?Year Plant expansion Product introduction 0 -$3,500,000
=+P10-28 Problems with IRR Antonio is discussing an investment opportunity with his friend, Vincenzo. It has the following projected cash flows.
=+a. Calculate the investment’s net present value (NPV) at each of the following discount rates: 0%, 5%, 7.5%, 10%, 15%, 20%, 25%, and 30%.b. What does the NPV profile tell you about this project’s IRR?c. If Antonio follows the IRR decision rule and his cost of capital is 5%, should he accept
=+d. If Antonio’s cost of capital is 5%, should he reject or accept the investment based on its NPV?
=+P10–29 ETHICS PROBLEM Diane Dennison is a financial analyst working for a large chain of discount retail stores. Her company is looking at the possibility of replacing the existing fluorescent lights in all of its stores with LED lights. The main advantage of making this switch is that the LED
=+a. What is the NPV of each investment? Which investment (if either) should the company undertake?
=+b. David approaches Diane for a favor. David says that the solar lighting project is a pet project of his boss, and David really wants to get the project approved to curry favor with his boss. He suggests to Diane that they roll their two projects into a single proposal. The cash flows for this
=+c. What is the ethical issue that Diane faces? Is any harm done if she does the favor for David as he asks?
=+a. Calculate the project’s net present value (NPV). Is the project acceptable under the NPV technique? Explain.
=+b. Calculate the project’s internal rate of return (IRR). Is the project acceptable under the IRR technique? Explain.
=+c. In this case, did the two methods produce the same results? Generally, is there a preference between the NPV and IRR techniques? Explain.
=+d. Calculate the payback period for the project. If the firm usually accepts projects that have payback periods between 1 and 7 years, is this project acceptable?
=+11–2 What three types of net cash flows may exist for a given project?
=+How can expansion decisions be treated as replacement decisions?Explain.
=+11–3 What effect do sunk costs and opportunity costs have on a project’s net cash flows?
=+11–4 How can firms mitigate currency risk and political risk when investing in a foreign country?
=+11–5 Explain how to use each of the following inputs to calculate the initial investment: (a) cost of the new asset, (b) installation costs, (c) proceeds from the sale of the old asset, (d) tax on the sale of the old asset, and(e) change in net working capital.
=+11–6 How do you calculate the book value of an asset?
=+11–9 How does depreciation enter into the calculation of operating cash flows?
=+ How does the income statement format in Table 11.6 relate to Equation 4.3 for finding operating cash flow (OCF)?
=+11–10 How are the net operating cash flows that are associated with a replacement decision calculated?
=+11–12 Diagram and describe the three types of net cash flows for a capital budgeting project.
=+The chapter opener talked about the $12 billion acquisition by Molson Coors of the MillerCoors joint venture. According to Molson, the acquisition provided 15 years’worth of tax savings in the amount of $250 million per year. These tax benefits had a present value at the time of the acquisition
=+What is the discount rate that Molson Coors is applying to this deal?
=+ST11–1 Book value, taxes, and initial investment Irvin Enterprises, a sole proprietorship, is purchasing of a new piece of equipment to replace the old equipment. The new version costs$75,000 and requires $5,000 in installation costs. It will be depreciated under MACRS, using a 5-year recovery
=+a. Calculate the book value of the old piece of equipment.
=+b. Determine the taxes, if any, attributable to the sale of the old equipment.
=+c. Find the initial investment associated with the proposed equipment replacement.
=+LG 3 LG 4 ST11–2 Determining net cash flows A machine in use by a partnership was purchased 2 years ago for $40,000. The machine is being depreciated under MACRS, using a 5-year recovery period. It has 3 years of life remaining, and it can be sold today to net$42,000. A new machine, using a
=+a. Determine the initial investment associated with the proposed replacement decision.
=+b. Calculate the operating cash flows for years 1 to 4 associated with the proposed replacement. (Note: Only depreciation cash flows must be considered in year 4.)
=+c. Calculate the terminal cash flow associated with the proposed replacement decision. (Note: This decision is made at the end of year 3.)
=+d. Depict on a timeline the net cash flows found in partsa, b, and c that are associated with the proposed replacement decision, assuming it is terminated at the end of year 3.
=+E11–1 If the Institute of Modeling for Businesses (IMB), an Albanian firm that develops software for enterprises, reimburses employees who earn an Oracle Certification and who agree to remain with the firm for an additional 2 years, should the expense of the tuition reimbursement be
=+LG 2 E11–2 Iridium Corp. has spent $3.5 billion over the past decade developing a satellite-based telecommunication system. It is currently trying to decide whether to spend an additional $350 million on the project. The firm expects that this outlay will finish the project and will generate
=+LG 3 LG 4 E11–4 A few years ago, Tasty Food Company purchased an automatic production line at an installed cost of $325,000. The company has recognized depreciation expenses totaling $215,250 since its installation. What is the production line’s current book value? If Tasty Food sells the
=+LG 3 LG 4 E11–5 Hoffmann-La Roche is considering purchasing a capsule counting and packing machine for €5,500,000 and incurs an additional €130,000 in installation expenses.It is replacing older machines that can be sold for €250,000, resulting in taxes from a gain on the sale of
=+P11–1 Classification of expenditures Given the following list of expenditures, indicate whether each is normally considered an operating expenditure or a capital expenditure. Explain your answers.a. An initial lease payment of $7,500 for renting an office building
=+b. An outlay of $150,000 to purchase a trademark for manufacturing a new product linec. Repair and maintenance expenses of $4,500 paid for a delivery truckd. A total of $2,300 paid for fuel for company vehiclese. A cash outlay of $980,000 to acquire a new office building
=+f. A cash outflow of $249,000 for a major research and development program g. An amount of $32,000 written off as bad debts and cannot be collected h. A $108,000 payment for major structural improvements to an office building
=+P11–2 Net cash flow and timeline depiction For each of the following projects, determine the net cash flows, and depict the cash flows on a timeline.
=+a. A project that requires an initial investment of $120,000 and will generate annual operating cash inflows of $25,000 for the next 18 years. In each of the 18 years, maintenance of the project will require a $5,000 cash outflow.
=+b. A new machine with an installed cost of $85,000. Sale of the old machine will yield $30,000 after taxes. Operating cash inflows generated by the replacement will exceed the operating cash inflows of the old machine by $20,000 in each year of a 6-year period. At the end of year 6, liquidation
=+c. An asset that requires an initial investment of $2 million and will yield annual operating cash inflows of $300,000 for each of the next 10 years. Operating cash outlays will be $20,000 for each year except year 6, when an overhaul requiring an additional cash outlay of $500,000 will be
=+LG 2 P11–3 Replacement versus expansion cash flows Stable Nuclear Corporation has estimated the cash flows over the 5-year lives for two projects, A and B. These cash flows are summarized in the table below.
=+a. If project A is a replacement for project B and the $38,000 initial investment shown for project B is the after-tax cash inflow expected from liquidating it, what would be the net cash flows for this replacement decision?
=+b. Instead, if project A is an expansion decision, what would be the net cash flows and how can it be viewed as a special form of a replacement decision? Explain.
=+LG 2 P11–4 Sunk costs and opportunity costs Luxottica Group spent 2 years and €1,000,000 to develop its new line of folding eyewear to replace an older line. To begin manufacturing them, the company will have to invest €2,500,000 in new equipment. The new eyewear line is expected to
=+a. How should the €1,000,000 in development costs be classified?
=+b. How should the €300,000 sale price for the existing line be classified?
=+c. Depict all the known incremental cash flows on a timeline.
=+P11–5 Sunk costs and opportunity costs Gen-X Industries is developing the incremental cash flows associated with the proposed replacement of an existing machine tool with a new, technologically advanced one. Given the following costs related to the proposed project, explain whether each would
=+a. Gen-X would be able to use the same tooling, which had a book value of$40,000, on the new machine tool as it had used on the old one.
=+b. Gen-X would be able to use its existing computer system to develop programs for operating the new machine tool. The old machine tool did not require these programs. Although the firm’s computer has excess capacity available, the capacity could be leased to another firm for an annual fee of
=+c. Gen-X would have to obtain additional floor space to accommodate the larger new machine tool. The space that would be used is currently being leased to another company for $10,000 per year.
=+d. Gen-X would use a small storage facility to store the increased output of the new machine tool. The storage facility was built by Gen-X 3 years earlier at a cost of$120,000. Because of its unique configuration and location, it is currently of no use to either Gen-X or any other firm.
=+e. Gen-X would retain an existing overhead crane, which it had planned to sell for its$180,000 market value. Although the crane was not needed with the old machine tool, it would be used to position raw materials on the new machine tool.Personal Finance Problem
=+LG 2 P11–6 Sunk and opportunity cash flows Hans has been living in his current apartment in the Helmholtzkiez neighborhood in Berlin for the past 10 years. During that time, he has replaced the coffee maker for €300, has replaced the washing machine for €350, and has had to make
=+a. Does Hans understand the difference between sunk costs and opportunity costs?Explain the two concepts to him.
=+b. Which of the expenditures should be classified as sunk cash flows, and which should be viewed as opportunity cash flows?
=+LG 4 LG 5 P11–7 Book value Find the book value for each of the assets shown in the following table, assuming that MACRS depreciation is being used. (See Table 4.2 for the applicable depreciation percentages.)Asset Installed cost Recovery period (years)Elapsed time since purchase (years)A $
=+P11–8 Book value and taxes on sale of assets Research Clinic purchased a blood-testing machine 4 years ago for $96,000. It is being depreciated under MACRS with a 7-year recovery period, using the percentages given in Table 4.2. Assume a 30% tax rate.
=+a. What is the book value of the machine?
=+b. Calculate the clinic’s tax liability if it sold the machine for each of the following amounts: $120,000; $26,000; $231,200; and $21,000.
=+LG 3 LG 4 P11–9 Tax calculations An asset was purchased 5 years ago for $460,200 and is being depreciated under MACRS, using a 7-year recovery period. (See Table 4.2 for the applicable depreciation percentages.) For each of the following cases, determine the total taxes payable, with a 20% tax
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