Hayden Inc. is evaluating four investment projects. Project A will require a $90 million upfront investment...

Transcribed Image Text:

Hayden Inc. is evaluating four investment projects. Project A will require a $90 million upfront investment and will generate $30 million, $42 million, $46 million, $50 million net cash inflows in the first, second, third year and fourth year, respectively. Project B will require a $90 million upfront investment and will generate $36 million net cash inflows each year for the next 4 years. Project C will require a $60 million upfront investment and will generate $17 million net cash inflows each year for the next 6 years. And Project D will require a $100 million upfront investment and will generate $23 million net cash inflows each year for the next 10 years. Hayden Inc. has a total capital budget of $250 million. The cost of capital for all of the projects is 10%. (a) Which project(s) should Hayden Inc. invest in? [20 marks] (b) Suppose the residual earnings of Hayden Inc. are not sufficient to cover the investments required by the projects, and the company will need to use the external financing. Critically discuss the fundamental considerations that managers should be concerned with when they choose between debt and equity finance. [40 marks] (c) Critically discuss the arguments for and against the use of the Internal Rate of Return as project appraisal method. You can use your OWN illustrative or numerical example to support your discussion. (Note: The examples from textbooks, lecture slides, tutorials, or internet sources are not acceptable.) Hayden Inc. is evaluating four investment projects. Project A will require a $90 million upfront investment and will generate $30 million, $42 million, $46 million, $50 million net cash inflows in the first, second, third year and fourth year, respectively. Project B will require a $90 million upfront investment and will generate $36 million net cash inflows each year for the next 4 years. Project C will require a $60 million upfront investment and will generate $17 million net cash inflows each year for the next 6 years. And Project D will require a $100 million upfront investment and will generate $23 million net cash inflows each year for the next 10 years. Hayden Inc. has a total capital budget of $250 million. The cost of capital for all of the projects is 10%. (a) Which project(s) should Hayden Inc. invest in? [20 marks] (b) Suppose the residual earnings of Hayden Inc. are not sufficient to cover the investments required by the projects, and the company will need to use the external financing. Critically discuss the fundamental considerations that managers should be concerned with when they choose between debt and equity finance. [40 marks] (c) Critically discuss the arguments for and against the use of the Internal Rate of Return as project appraisal method. You can use your OWN illustrative or numerical example to support your discussion. (Note: The examples from textbooks, lecture slides, tutorials, or internet sources are not acceptable.)

Answer rating: 100% (QA)

a To evaluate which projects Hayden Inc should invest in we can use the net present value NPV method NPV is the present value of future cash inflows minus the present value of initial investment costs ... View the full answer