11-5: Your company is considering a project to expand operations, but the evaluation of traditional NPV...
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11-5: Your company is considering a project to expand operations, but the evaluation of traditional NPV shows a negative amount of $2,500. Closer examination shows that there is a 35% chance of additional gain from project abandonment at the end of 3 years, adding to the NPV in the amount of $3,000. Also, there is a 45% chance that projected stimulus from the project would increase the NPV by $4,000. (A) Calculate the strategic net present value (NPV) from the additional information. (B) What is your recommendation to the management team? 11-6: Your company is investigating the following projects to meet its capital budget. The company wants to avoid any unused portion of the fixed budget of $5,000,000. Assume cost of capital is 14%. Data for the various projects follows: Project Initial investment IRR Present value of cash flows except initial investment i -$5,500,000 16% $5,600,000 ii 17% $1,300,000 -$1,050,000 -$2,100,000 18% $2,500,000 iv V -$1,650,000 -$1,050,000 -$2,600,000 -$1,350,000 15% $1,850,000 21% $1,150,000 22% $3,250,000 $1,400,000 vi vii 19% (A) Select the best group of projects according to the internal rate of return (IRR) approach. (B) Select the best group of projects according to the net present value (NPV) approach. (C) Within the capital budget limit, which combination of projects contributes more to shareholder wealth? 11-5: Your company is considering a project to expand operations, but the evaluation of traditional NPV shows a negative amount of $2,500. Closer examination shows that there is a 35% chance of additional gain from project abandonment at the end of 3 years, adding to the NPV in the amount of $3,000. Also, there is a 45% chance that projected stimulus from the project would increase the NPV by $4,000. (A) Calculate the strategic net present value (NPV) from the additional information. (B) What is your recommendation to the management team? 11-6: Your company is investigating the following projects to meet its capital budget. The company wants to avoid any unused portion of the fixed budget of $5,000,000. Assume cost of capital is 14%. Data for the various projects follows: Project Initial investment IRR Present value of cash flows except initial investment i -$5,500,000 16% $5,600,000 ii 17% $1,300,000 -$1,050,000 -$2,100,000 18% $2,500,000 iv V -$1,650,000 -$1,050,000 -$2,600,000 -$1,350,000 15% $1,850,000 21% $1,150,000 22% $3,250,000 $1,400,000 vi vii 19% (A) Select the best group of projects according to the internal rate of return (IRR) approach. (B) Select the best group of projects according to the net present value (NPV) approach. (C) Within the capital budget limit, which combination of projects contributes more to shareholder wealth?
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Related Book For
Intermediate Financial Management
ISBN: 978-1285850030
12th edition
Authors: Eugene F. Brigham, Phillip R. Daves
Posted Date:
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