Case Study FIN 534 Week 10

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Case Study FIN 534 Week 10

Symone Reynolds
Homework -Week 10
Case Study
Your division is inconsideration for two investments, each of which requires an upfront expenditure of $25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after tax cash flows (in millions of dollars): Year Project A
Year Project A Project B 0 (25,000,000.00) PBP DPBP
1 5,000,000 20,000,000 1 5,000,000.00 (20,000,000.00) 0.909 4,545,000.00 (20,455,000.00) 1
2 10,000,000 10,000,000 2 10,000,000.00 (10,000,000.00) 2 Years 0.826 8,260,000.00 (12,195,000.00) 2
3 15,000,000 8,000,000 3 15,000,000.00 5,000,000.00 8 Months 0.751 11,265,000.00 (930,000.00) 3 Years
4 20,000,000 6,000,000 4 20,000,000.00 0.683 13,660,000.00 12,730,000.00 1 Month PV = 37,730,000.00
Calculate the following: From Computation Worksheet (Month/s are rounded up) Cost 25,000,000.00 Project A Project B NPV 12,730,000.00
Payback period 2 Years and 8 Months 1 Year and 6 Months
Discounted Payback Period 3 Years and 1 Month 1 Year and 10 Months PI = PV/Cost= 1.51
Net Present Value $12,730,000.00 $11,546,000.00
Profitability Index 1.51 1.46
Internal Rate of return 27.27% 36.15%
Modified Internal Rate of return 21.93% 20.96% Year Project B 0 (25,000,000.00) PBP DPBP Project A (IRR) Rate 10% 1 20,000,000.00 (5,000,000.00) 1 Year 0.909 18,180,000.00 (6,820,000.00) 1 Year
Year Data Description 2 10,000,000.00 5,000,000.00 6 Months 0.826 8,260,000.00 1,440,000.00 10 Months
0 (25,000,000.00) Initial cost of a business 3 8,000,000.00 13,000,000.00 0.751 6,008,000.00 7,448,000.00
1 5,000,000.00 Net income for the first year -80.00% 4 6,000,000.00 0.683

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