Quadrant is a highly geared company that wishes to expand itsoperations. Six possible capital investments have...
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Quadrant is a highly geared company that wishes to expand itsoperations. Six possible capital investments have been identified, butthe company only has access to a total of $620,000. The projects may notbe postponed until a future period. After the projects end, it isunlikely that similar investment opportunities will occur. Expected net cash flows (including residual values) are: Project A B C D E F Year 2 0 1 3 4 5 (246,000) 70,000 70,000 70,000 70,000 70,000 (180,000) 75,000 87,000 64,000 (175,000) 48,000 48,000 63,000 73,000 (180,000) 62,000 62,000 62,000 62,000 (180,000) 40,000 (150,000) 35,000 82,000 82,000 50,000 60,000 70,000 40,000 Projects A and E are mutually exclusive. All projects are believed to be of similar risk to the company's existing capital investments. Any surplus funds may be invested in the money market to earn areturn of 9% per year. The money market may be assumed to be anefficient market. Quadrant's cost of capital is 12% per year. Required: (a) Calculate the expected Net Present Value for each project, and rank the projects. (7 marks) (b) Assuming the projects aredivisible, calculate the profitability index for each project, and rankthe projects to determine how the money would be best invested. Explainbriefly why the rankings differ from that in (a) above. (7 marks) (c) Now assume the projects are indivisible. Provide advise on how the funds are best invested. (5 marks) (d) Explain how uncertainty and risk could be considered in the investment process. Quadrant is a highly geared company that wishes to expand itsoperations. Six possible capital investments have been identified, butthe company only has access to a total of $620,000. The projects may notbe postponed until a future period. After the projects end, it isunlikely that similar investment opportunities will occur. Expected net cash flows (including residual values) are: Project A B C D E F Year 2 0 1 3 4 5 (246,000) 70,000 70,000 70,000 70,000 70,000 (180,000) 75,000 87,000 64,000 (175,000) 48,000 48,000 63,000 73,000 (180,000) 62,000 62,000 62,000 62,000 (180,000) 40,000 (150,000) 35,000 82,000 82,000 50,000 60,000 70,000 40,000 Projects A and E are mutually exclusive. All projects are believed to be of similar risk to the company's existing capital investments. Any surplus funds may be invested in the money market to earn areturn of 9% per year. The money market may be assumed to be anefficient market. Quadrant's cost of capital is 12% per year. Required: (a) Calculate the expected Net Present Value for each project, and rank the projects. (7 marks) (b) Assuming the projects aredivisible, calculate the profitability index for each project, and rankthe projects to determine how the money would be best invested. Explainbriefly why the rankings differ from that in (a) above. (7 marks) (c) Now assume the projects are indivisible. Provide advise on how the funds are best invested. (5 marks) (d) Explain how uncertainty and risk could be considered in the investment process.
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Answer rating: 100% (QA)
Present ValuePV of Cash Flow Cash Flow1iN idiscount rate Cost of Capital12012 NYear of Cash Flow CASH FLOW ANALYSIS OF PROJECTA IC Initial Outlay 2460... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones
Posted Date:
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