Corporate Governance and Accountability
Week 8
Capital Budgeting and Cash Flows
Read Moles et al Chapter 11, Damodaran Chapter 6
Review case study in Damodaran Chapter 5&6 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/ACF3E/appldCF3E.htm Questions – please submit your finished document on Turnitin by 4 pm Wed., Dec. 18. Include all basic calculations in your word document, but feel free to email me an excel file: e.bace@mdx.ac.uk. Try not to exceed 5-6 pages in your word document.
1. Explain why incremental after-tax free cash flows are relevant in evaluating a project. How would you calculate them for a project? (10 marks)
2. Discuss five general rules for incremental after-tax free cash flow calculations and explain why cash flows stated in nominal (real) money terms should be discounted using a nominal (real) discount rate. (15 marks)
3. Briefly explain two methods of comparing projects with different useful lives.
(10 marks)
4.
a) Whizzo Ltd is considering 3 independent projects which are expected to last 10 years each and generate the following net present values and internal rates of return:
Project X
Project Y
Project Z
Net Present Value
$2,000,000
-$600,000
$1,500,000
Internal Rate of Return
25.0%
12.0%
20.0%
The firm uses a discount rate of 15% to evaluate its investment projects. What should the firm do, and why?
(5 marks)
b) Firm ABC is considering investing in a new project due to the expected increase in sales next year. ABC has the following two mutually exclusive projects. The annual discount rate used for the projects is 12%. Which machine should the firm choose at this discount rate, and why?
End of Year
Project A
Project B
0
-$100,000
-$50,000
1
$60,000
$40,000
2
$50,000
$30,000
3
$40,000
(15 marks)
(TOTAL 20 marks)
4. You are the CFO of SlimBody, Inc., a retailer of the exercise machine Slimbody6® and related accessories. Your firm is considering opening up a new store in Los Angeles.
Capital Budgeting and Cash Flows
Read Moles et al Chapter 11, Damodaran Chapter 6
Review case study in Damodaran Chapter 5&6 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/ACF3E/appldCF3E.htm Questions – please submit your finished document on Turnitin by 4 pm Wed., Dec. 18. Include all basic calculations in your word document, but feel free to email me an excel file: e.bace@mdx.ac.uk. Try not to exceed 5-6 pages in your word document.
1. Explain why incremental after-tax free cash flows are relevant in evaluating a project. How would you calculate them for a project? (10 marks)
2. Discuss five general rules for incremental after-tax free cash flow calculations and explain why cash flows stated in nominal (real) money terms should be discounted using a nominal (real) discount rate. (15 marks)
3. Briefly explain two methods of comparing projects with different useful lives.
(10 marks)
4.
a) Whizzo Ltd is considering 3 independent projects which are expected to last 10 years each and generate the following net present values and internal rates of return:
Project X
Project Y
Project Z
Net Present Value
$2,000,000
-$600,000
$1,500,000
Internal Rate of Return
25.0%
12.0%
20.0%
The firm uses a discount rate of 15% to evaluate its investment projects. What should the firm do, and why?
(5 marks)
b) Firm ABC is considering investing in a new project due to the expected increase in sales next year. ABC has the following two mutually exclusive projects. The annual discount rate used for the projects is 12%. Which machine should the firm choose at this discount rate, and why?
End of Year
Project A
Project B
0
-$100,000
-$50,000
1
$60,000
$40,000
2
$50,000
$30,000
3
$40,000
(15 marks)
(TOTAL 20 marks)
4. You are the CFO of SlimBody, Inc., a retailer of the exercise machine Slimbody6® and related accessories. Your firm is considering opening up a new store in Los Angeles.