Assume you are presented with the following mutually exclusive investments whose expected net cash flows are...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows: EXPECTED NET CASH FLOWS: Year 0 1 2 34567 Project A -$400 -528 -219 -150 1,100 820 990 -325 Project B -$650 210 210 210 210 210 210 210 1. (a) What is each project's IRR? (b) If each project's cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice? 2. (a) What is each project's MIRR at the cost of capital of 10% ? At 17% ? (Hint: Consider Period 7 as the end of Project B's life.) 3. What is the crossover rate, and what is its significance? Use the following information for Question 4: The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process: Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter's cost of capital for an average-risk project is 10%. Net After-Tax Cash Flows Year P = 0.2 -$100,000 20,000 20,000 20,000 20,000 20,000 0 0 1 2 3 455 P = 0.6 -$100,000 30,000 30,000 30,000 30,000 30,000 20,000 P = 0.2 -$100,000 40,000 40,000 40,000 40,000 40,000 30,000 4. Assume that the project has average risk. Find the project's expected NPV. (Hint: Use expected values for the net cash flow in each year.) Use the following information for Questions 1 and 2: Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one- time unusual earnings growth won't be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%. Calculate Boehm's total dividends for 2014 under each of the following policies: 1. (a) Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. (b) It continues the 2013 dividend payout ratio. 2. (a) It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3 million investment is financed with debt). (b) It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy. Use the following information for Questions 3 and 4: Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm's fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the firm's assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt. 3. What is the incremental profit? To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not? 4. Would the firm's break-even point increase or decrease if it made the change? Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows: EXPECTED NET CASH FLOWS: Year 0 1 2 34567 Project A -$400 -528 -219 -150 1,100 820 990 -325 Project B -$650 210 210 210 210 210 210 210 1. (a) What is each project's IRR? (b) If each project's cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice? 2. (a) What is each project's MIRR at the cost of capital of 10% ? At 17% ? (Hint: Consider Period 7 as the end of Project B's life.) 3. What is the crossover rate, and what is its significance? Use the following information for Question 4: The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process: Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter's cost of capital for an average-risk project is 10%. Net After-Tax Cash Flows Year P = 0.2 -$100,000 20,000 20,000 20,000 20,000 20,000 0 0 1 2 3 455 P = 0.6 -$100,000 30,000 30,000 30,000 30,000 30,000 20,000 P = 0.2 -$100,000 40,000 40,000 40,000 40,000 40,000 30,000 4. Assume that the project has average risk. Find the project's expected NPV. (Hint: Use expected values for the net cash flow in each year.) Use the following information for Questions 1 and 2: Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one- time unusual earnings growth won't be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%. Calculate Boehm's total dividends for 2014 under each of the following policies: 1. (a) Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings. (b) It continues the 2013 dividend payout ratio. 2. (a) It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3 million investment is financed with debt). (b) It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy. Use the following information for Questions 3 and 4: Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm's fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the firm's assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt. 3. What is the incremental profit? To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not? 4. Would the firm's break-even point increase or decrease if it made the change?
Expert Answer:
Answer rating: 100% (QA)
1a Project A 400 8201r 9901r2 0 r 2075 Project B 650 2101r 2101r2 2101r3 0 r 2100 b Assuming a 10 co... View the full answer
Related Book For
Intermediate Financial Management
ISBN: 978-1285850030
12th edition
Authors: Eugene F. Brigham, Phillip R. Daves
Posted Date:
Students also viewed these accounting questions
-
Calculate the prob. current. Been 4(a) A eikr - density for a 3 dem -ika
-
A firm is considering the following projects, all of which are independent of one another. Available funds are limited to SR3 million only in this capital budgeting period, but future periods will...
-
Use the following information for questions 1 through 5: Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows: 1. Construct NPV...
-
Is Madisons response regarding the factors that affect short-term and long-term rate volatility correct? A. Yes B. No, she is incorrect regarding factors linked to long-term rate volatility C. No,...
-
How do we report components of comprehensive income created during the reporting period?
-
Addition of hydrogen chloride to 2-methyl-1,3-butadiene is a kinetically controlled reaction and gives one product in much greater amounts than any isomers. What is this product?
-
Find the critical value f0.01 for F2,5.
-
The ANES in 2012 asked respondents to state their ages stored as AGE. a. Calculate the mean, variance, and standard deviation. b. Draw a histogram. c. Use the Empirical rule, if applicable, or...
-
Manal Pvt.Ltd. budgeted incomestatement for 1st quarter 2020 Description JANUARY FEBRUARY MARCH Sales 285,000 323,000 221,000 Purchases 129,000 168,000 95,000 Wages 35,000 37,000 30,000 Supplies...
-
A laser pointer is kept at a constant and fixed height above the floor, but it can move horizontally back and forth in a straight line. A mirror is placed on a platform at a fixed distance from a...
-
The staff dietician at the California Institute of Trigonometry has to make up a meal with 600 calories, 20 grams of protein, and 200 milligrams of vitamin C. There are three food types to choose...
-
What problems may exist in the relationship between donations and ticketing for college athletic events?
-
What differences in structure lead to financial differences among NCAA member institutions?
-
What is the difference between win maximization and profit maximization? How can these differing philosophies cause problems in professional sport leagues?
-
Why do professional leagues establish rules governing the financial operation of individual franchises?
-
You have been asked to consult for an entrepreneur who is assembling investors for a new professional sport league. A critical decision for the league will be whether to organize under a...
-
What best describes the financial concept of debt serviceability? A. The ability to pay interest expense during the year. B. The ability to pay long-term debt as it becomes due. C. The ability to...
-
Research corporate acquisitions using Web resources and then answer the following questions: Why do firms purchase other corporations? Do firms pay too much for the acquired corporation? Why do so...
-
Start with the partial model in the file Ch05 P08 Build a Model.xls on the textbook's Web site. You have been given the following information for a call option on the stock of Puckett Industries: P =...
-
Porporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds?
-
Garlington Technologies Inc.'s 2015 financial statements are shown below: Balance Sheet as of December 31, 2015 Income Statement for December 31, 2015 Sales...
-
The parameters of the transistor in the circuit in Figure P7.40 are \(\beta=100\), \(V_{B E}\) (on) \(=0.7 \mathrm{~V}\), and \(V_{A}=\infty\). Neglect the capacitance effects of the transistor. (a)...
-
In the common-source amplifier in Figure 7.25 (a) in the text, a source bypass capacitor is to be added between the source terminal and ground potential. The circuit parameters are \(R_{S}=3.2...
-
Consider the common-base circuit in Figure P7.42. Choose appropriate transistor parameters. (a) Using a computer analysis, generate the Bode plot of the voltage gain magnitude from a very low...
Study smarter with the SolutionInn App