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essentials managerial finance
Principles Of Managerial Finance 15th Global Edition Chad J. Zutter, Scott Smart - Solutions
=+a. Calculate the NPV for each project over its respective life. Rank the projects in descending order on the basis of NPV. Which one would you choose?
=+b. Use the annualized net present value (ANPV) approach to evaluate and rank the projects in descending order on the basis of ANPV. Which one would you choose?
=+c. Compare and contrast your findings in parts a andb. Which project would you recommend that the firm choose? Explain.
=+a. For each of the two proposed replacement presses, determine:(1) Initial investment.(2) Operating cash inflows. (Note: Be sure to consider the depreciation in year 6.)(3) Terminal cash flow. (Note: This is at the end of year 5.)
=+b. Using the data developed in parta, find and depict on a timeline the relevant cash flow stream associated with each of the two proposed replacement presses, assuming that each is terminated at the end of 5 years.
=+c. Using the data developed in partb, apply each of the following decision techniques:(1) Payback period. (Note: For year 5, use only the operating cash inflows—that is, exclude terminal cash flow—when making this calculation.)(2) Net present value (NPV).(3) Internal rate of return (IRR).
=+d. Draw net present value profiles for the two replacement presses on the same set of axes, and discuss conflicting rankings of the two presses, if any, resulting from use of NPV and IRR decision techniques.
=+e. Recommend which, if either, of the presses the firm should acquire if the firm has(1) unlimited funds or (2) capital rationing.
=+f. The operating cash inflows associated with press A are characterized as very risky, in contrast to the low-risk operating cash inflows of press B. What impact does that have on your recommendation?
=+10–1 What is the financial manager’s goal in selecting investment projects for the firm?
=+ Define the capital budgeting process, and explain how it helps managers achieve their goal.
=+10–5 What decision rule do managers follow when they use NPV to accept or reject investment ideas? How is an investment’s NPV related to the firm’s market value?
=+10–9 What is the decision rule that managers follow when they use the IRR method to accept or reject investment proposals? How is that decision rule related to the firm’s market value?
=+10–10 Do the net present value (NPV) and internal rate of return (IRR) agree with respect to accept–reject decisions? With respect to ranking decisions? Explain.
=+10–11 In addition to using NPV to evaluate projects, most firms also use IRR.With the information provided at MyLab Finance, use a spreadsheet to rank various projects based on their IRRs.
=+a. The chapter opener reported that the project had an NPV of $44.2 million and an internal rate of return of 34.8%. From those two facts alone, what can you conclude about Maritime’s cost of capital?
=+b. Given the information above about the project’s NPV, its initial cost, and the subsequent cash flows that it generates, can you estimate Maritime’s cost of capital?
=+c. What is the project’s payback period?
=+ST10–1 All techniques with NPV profile: Mutually exclusive projects Fitch Industries is in the process of choosing the better of two equal-risk, mutually exclusive capital expenditure projects, M and N. The relevant cash flows for each project are shown in the following table. The firm’s cost
=+a. Calculate each project’s payback period.
=+b. Calculate the net present value (NPV) for each project.
=+c. Calculate the internal rate of return (IRR) for each project.
=+d. Summarize the preferences dictated by each measure you calculated, and indicate which project you would recommend. Explain why.
=+e. Draw the net present value profiles for these projects on the same set of axes, and explain the circumstances under which a conflict in rankings might exist.
=+E10–2 Sweet Taters Corporation is considering the acquisition of a new cooking machine. The initial investment (CF0) estimate is $2.52 million. The machine purchased will have a 5-year life with no salvage value. Using a 10% discount rate, determine the net present value (NPV) of the machine
=+LG 4 LG 5 E10–5 Cooper Electronics uses NPV profiles to visually evaluate competing projects. Key data for the two projects under consideration are given in the following table. Using these data, graph, on the same set of axes, the NPV profiles for each project, using discount rates of 0%, 8%,
=+P10–1 Payback period Quick Profit Entity is considering a capital expenditure that requires an initial investment of $84,000 and returns after-tax cash inflows of $7,000 per year for 20 years. The firm has a maximum acceptable payback period of 8 years.
=+a. Determine the payback period for this project.
=+b. Should Quick Profit accept the project? Explain.
=+LG 2 P10–2 Payback comparisons Soviet Services has a 5-year maximum acceptable payback period. The firm is considering purchasing a new washing machine and must choose between two alternatives. The first machine, IntelWash, requires an initial investment of $25,000 and generates annual
=+a. Determine the payback period for IntelWash and KwikWash.
=+b. Comment on the acceptability of the machines, assuming they are independent projects.
=+c. Which machine should Soviet Services purchase? Why?
=+d. Do the machines in this problem illustrate any of the weaknesses of using payback? Discuss.
=+LG 2 P10–3 Choosing between two projects with acceptable payback periods Conad, an Italian supermarket chain, is considering two mutually exclusive projects. Each project requires an initial investment (CF0) of €1,000,000. Francesco Pugliese, the general director of Conad, has set a maximum
=+a. Determine the payback period of each project.
=+b. Because the projects are mutually exclusive, Conad must choose one. Which one should the company invest in?
=+c. Explain why the payback period might not be the best method for choosing between the projects.Personal Finance Problem
=+LG 2 P10–4 Long-term investment decision, payback method Francesco Giovanni’s business partner, Pepino, has proposed that they invest in a coffee shop. This investment costs €90,000 today and promises to pay €22,000, €25,000, €25,000, €20,000, and€18,000 over the next 5 years.
=+a. How long will it take for Francesco and Pepino to recoup their initial investment in the coffee shop?
=+b. How long will it take them to recoup their initial investment in the restaurant?
=+c. Using the payback period, which project should Francesco and Pepino choose?
=+d. Do you see any problems with their choice?
=+LG 3 P10–5 NPV Diamantis Masoutis S.A. is considering the following 10-year projects. Comment on the acceptability of each project. Assume that the firm has a cost of capital of 5%.
=+a. Initial investment is €1,000,000; cash inflows are €100,000 per year.
=+b. Initial investment is €2,000,000; cash inflows are €250,000 per year.
=+c. Initial investment is €2,500,000; cash inflows are €400,000 per year.
=+LG 3 P10–6 NPV for varying costs of capital Empire Hotel is considering acquiring new flatpanel displays to replace the antiquated computer terminals at the registration desk.The new computer displays require an initial investment of $235,000 and will generate after-tax cash inflows of
=+a. The cost of capital is 8%.b. The cost of capital is 10%.c. The cost of capital is 15%.
=+LG 3 P10–7 Net present value: Independent projects Using a 10% cost of capital, calculate the net present value for each of the independent projects shown in the following table, and indicate whether each is acceptable.
=+P10–8 NPV Simes Innovations Inc. is negotiating to purchase exclusive rights to manufacture and market a solar-powered toy car. The car’s inventor has offered Simes the choice of either a one-time payment of $1,500,000 today or a series of five year-end payments of $385,000.
=+a. If Simes has a cost of capital of 9%, which form of payment should it choose?
=+b. What yearly payment would make the two offers identical in value at a cost of capital of 9%?
=+c. Would your answer to part a of this problem be different if the yearly payments were made at the beginning of each year? Show what difference, if any, that change in timing would make to the present value calculation.
=+d. The after-tax cash inflows associated with this purchase are projected to amount to $250,000 per year for 15 years. Will this factor change the firm’s decision about how to fund the initial investment?
=+P10–9 NPV and maximum return DC Fragrance considers purchasing a new fragrancemixing machine for a $245,000 initial investment. The machine generates an annual after-tax cash inflow of $68,500 for 5 years.
=+a. Determine the net present value (NPV) of the machine, assuming that the firm has a 15% cost of capital. Is the project acceptable?
=+b. If the firm’s cost of capital is lower than 15%, does the investment in the machine become more or less desirable? What is the highest cost of capital (closest whole percentage rate) that the firm can have and still find that purchasing the machine is worthwhile? Discuss this finding in
=+LG 3 P10–10 NPV: Mutually exclusive projects The BMW Group is considering the replacement of one of its car-manufacturing robot lines. Three alternative replacement robot lines are under consideration. The relevant cash flows associated with each line are shown in the following table. The
=+a. Calculate the net present value (NPV) of each line.
=+b. Using NPV, evaluate the acceptability of each line.
=+c. Rank the lines from best to worst, using NPV.
=+d. Calculate the profitability index (PI) for each line.
=+e. Rank the lines from best to worst, using PI.Personal Finance Problem
=+LG 3 P10–11 Long-term investment decision, NPV method Mavis Chan is a financial controller of a listed company, and has researched the financial pros and cons of enrolling in a 1-year Executive MBA (EMBA) program at a local university. The tuition and books for the EMBA program will have an
=+LG 2 LG 3 P10–12 Payback and NPV Neil Corporation has three projects under consideration. The cash flows for each project are shown in the following table. The firm has a 16%cost of capital.
=+a. Calculate each project’s payback period. Which project is preferred according to this method?
=+b. Calculate each project’s net present value (NPV). Which project is preferred according to this method?
=+c. Comment on your findings in parts a andb, and recommend the best project.Explain your recommendation.
=+LG 3 P10–13 NPV and EVA Assume Project X costs $860,000 initially and will generate cash flows in perpetuity of $320,000. The firm’s cost of capital is 12%.
=+a. Calculate the project’s NPV.
=+b. Calculate the annual EVA in a typical year.
=+c. Calculate the overall project EVA and compare to your answer in part a.
=+LG 4 P10–14 Internal rate of return For each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each project, the maximum cost of capital that the firm could have and still find the IRR acceptable.
=+P10–16 IRR: Mutually exclusive projects Ocean Pacific Restaurant is evaluating two mutually exclusive projects for expanding the seating capacity at the restaurant. The following table shows the relevant cash flows for the projects. The firm’s cost of capital is 4%.
=+a. Calculate the IRR to the nearest whole percent for each of the projects.
=+b. Assess the acceptability of each project based on the IRRs found in part a.
=+c. Which project, on this basis, is preferred?Personal Finance Problem
=+LG 4 LG 5 P10–17 Problems with the IRR method Wesfarmers, an Australian conglomerate, is considering investing in a project that has the following unusual cash flow pattern.
=+a. Calculate the project’s NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, and 50%.
=+b. What do the calculations tell you about this project’s IRR? The IRR rule tells managers to invest if a project’s IRR is greater than the cost of capital. If Wesfarmers’cost of capital is 12%, should it accept or reject this investment?
=+c. According to you, what is the best way to make decisions for projects with unusual cash flows?
=+LG 4 P10–18 IRR, investment life, and cash inflows Oak Enterprises accepts projects earning more than the firm’s 15% cost of capital. Oak is currently considering a 10-year project that provides annual cash inflows of $10,000 and requires an initial investment of $61,450. (Note: All amounts
=+a. Determine the IRR of this project. Is it acceptable?
=+b. Assuming that the cash inflows remain at $10,000 per year, how many additional years would the flows have to continue to make the project acceptable(i.e., to make it have an IRR of 15%)?
=+c. With a 10-year life, an initial investment of $61,540, and a cost of capital of 15%, what is the minimum annual cash inflow the investment would have to provide in order for this project to make sense for Oak’s shareholders?
=+P10–19 NPV and IRR Gigantic Group has prepared the following estimates for a long-term expansion project. The initial investment is $248,250, and the project is expected to yield after-tax cash inflows of $65,000 per year for 5 years. The firm has an 8% cost of capital.
=+a. Determine the net present value (NPV) for the project.
=+b. Determine the internal rate of return (IRR) for the project.
=+c. Would you recommend that the firm accept or reject the project? Explain your answer.
=+LG 3 LG 4 P10–20 NPV, with rankings Botany Bay Inc., a maker of casual clothing, is considering four projects. Because of past financial difficulties, the company has a high cost of capital at 15%.
=+a. Calculate the NPV of each project, using a cost of capital of 15%.
=+b. Rank acceptable projects by NPV.
=+c. Calculate the IRR of each project, and use it to determine the highest cost of capital at which all the projects would be acceptable.
=+LG 2 LG 3 P10–21 All techniques, conflicting rankings Nicholson Roofing Materials Inc. is considering two mutually exclusive projects, each with an initial investment of $150,000. The company’s board of directors has set a maximum 4-year payback requirement and has set its cost of capital at
=+a. Calculate the payback period for each project.
=+b. Calculate the NPV of each project at 0%.
=+c. Calculate the NPV of each project at 9%.
=+d. Derive the IRR of each project.
=+e. Rank the projects by each of the techniques used. Make and justify a recommendation.
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