$1.($Chapter $12)$ Cash flow Assume a corporation has earnings before depreciation and taxes of $$90,000,$ depreciation of $$40,000,$ and a $25$ percent tax bracket. Compute its cash flow using the following format:

Earnings before depreciation and taxes Depreciation

Earnings before taxes

Taxes @ $25\%$

Earnings after taxes Depreciation

Cash flow

$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_$

$2.($Chapter $12)$ Payback method Assume a $$90,000$ investment and the following cash flows for two alternatives.

Year Investment A Investment B

$1$ $$25,000$ $$40,000230,00040,000325,00028,000419,000$

$525,000$

a$.$ Calculate the payback for investments A and B$.$

b$.$ If the inflow in the fifth year for Investment A was $$25,000,000$ instead of $$25,000,$ would your answer change under the payback method?

$3.($Chapter $12)$ Net present value method Aerospace Dynamics will invest $$110,000$ in a project that will produce the following cash flows. The cost of capital is $11$ percent. Should the project be undertaken? $($Note that the fourth year$$s cash flow is negative.$)$

Year

$12345$

Cash Flow

$$36,00044,00038,000$

$(44,000)81,000$

$4.($Chapter $12)$ Capital rationing and mutually exclusive investments The Suboptimal Glass Company uses a process of capital rationing in its decision making. The firm$$s cost of capital is $10$ percent. It will only invest $$77,000$ this year. It has determined the internal rate of return for each of the following projects.

Project

Project Size

Internal Rate of Return

A $$$$10,50021\%$

B $30,50022$

C $25,50018$

D $10,50013$

E $10,50020$

F $20,50011$

G $10,50016$

Select the projects that the firm should accept.

If Projects A and B are mutually exclusive, how would that affect your overall answer? That is$,$ which projects would you accept in spending the $$77,000?$

$5.($Chapter $13)$ Risk$-$averse Assume you are risk$-$averse and have the following three choices. Which project will you select? Compute the coefficient of variation for each.

Project

A B C

Expected Value $$2,200$

$2,7302,250$

Standard Deviation $$1,400$

$1,9601,4901.($Chapter $12)$ Cash flow Assume a corporation has earnings before depreciation and taxes of $\backslash (\backslash$$ $90,000\backslash ),$ depreciation of $\backslash (\backslash$$ $40,000\backslash ),$ and a $25$ percent tax bracket. Compute its cash flow using the following format:

Earnings before depreciation and taxes

Depreciation

Earnings before taxes

Taxes @ $25\backslash \%$

Earnings after taxes

Depreciation

Cash flow

$2.($Chapter $12)$ Payback method Assume a $\backslash (\backslash$$ $90,000\backslash )$ investment and the following cash flows for two alternatives.

a$.$ Calculate the payback for investments A and B$.$

b$.$ If the inflow in the fifth year for Investment A was $\backslash (\backslash$$ $25,000,000\backslash )$ instead of $\backslash (\backslash$$ $25,000\backslash ),$ would your answer change under the payback method?

$3.($Chapter $12)$ Net present value method Aerospace Dynamics will invest $\backslash (\backslash$$ $110,000\backslash )$ in a project that will produce the following cash flows. The cost of capital is $11$ percent. Should the project be undertaken? $($Note that the fourth year's cash flow is negative.$)$