FINC 324

Homework Assignment #2

Use the Excel Template Provided for these problems.

1.) BJR Inc. is considering two different projects, mutually exclusive projects. They are

creatively called project A and project B. The following is the cash flow profile for each

project.

Year

Project A

Project B

0

$(1,025)

$(1,025)

1

650

100

2

450

300

3

250

500

4

50

700

The weighted average cost of capital for both projects is 10%. Find the NPV, IRR and

Payback for both projects. Which project should be accepted and why?

2.) Your department is interested in replacing an old, inefficient production machine with a

new, more efficient machine. You've been asked by your supervisor to justify the

expense involved in purchasing the new machine. The following is information that has

been collected about the situation:

Information Relevant to Both Machines

Sales revenue:

$100,000 per year

Useful life of both machines:

5 years

WACC

12%

Tax Rate

40%

Information on the Old Machine

Sale value of the old machine today

$15,000

Labor costs per year

$12,000

Materials costs per year

$3,000

Energy costs per year

$20,000

Depreciation expense per year

$5,000

Information on the New Machine

Cost of the new machine

$60,000

Labor costs per year

$2,000

Materials costs per year

$1,500

Energy costs per year

$10,000

Depreciation expense per year

$12,000

What is NPV, IRR and Payback for this project?

3.) Your business unit currently manufactures and sells dog food. Your managers believe

there is an opportunity to expand into cat food. You've collected the following data

about this opportunity through discussions with your marketing, sales and production

teams:

Marketing Data:

There appears to be a total market today for 10,000,000 cans of cat food per year of

which we think we can capture 10% of the market for the next 5 years (and then after 5

years the opportunity will go away - so build a 5 year model).

Current pricing for cat food per can averages $3.00. We think we will need to price our

cat food at a 20% discount to the average in order to capture market share.

Marketing believes that they will need to spend $500,000 per year on advertising

regardless of the level of sales to promote this product

Production Data:

We will need to spend $750,000 on new production machines today to manufacture cat

food which will be depreciated on a straight-line basis over the course of the 5-year life

of the opportunity.

Fixed costs of production are expected to be $250,000 per year with variable expenses

of $1.40 per can of cat food produced.

It is expected that at the end of the 5-year project the equipment will have salvage value

equal to $50,000.

General:

The company's overall tax rate is 40%

You've been told that the company's hurdle rate on a new project proposal is 12%

Calculate the NPV and IRR for this project. Should this project be taken on? Why or why not?

(All problems should be done on Excel) Free cash flows for last two problems.