CHAPTER 6 Making Investment Decisions with the Net Present Value Rule Answers to Problem Sets 1. a‚ b‚ d‚ g‚ h; c is a sunk cost. e is an overhead cost. f is not an incremental cash flow because depreciation is not a cash flow. i is a sunk cost. Est. Time: 01 - 05 2. Real cash flow = 100‚000/1.04 = $96‚154. The real discount rate is calculated as 1 + nominal rate / 1+ inflation rate − 1. Therefore‚ 1.08/1.04 − 1 = .03846. PV = [pic] Est
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Capital Budgeting Part I PV= FV / (1+i)^y PV= present value‚ FV= future value‚ i= discount rate‚ and y= time. 1a) If the discount rate is 0%‚ what is the projects net present value? Year Cash Flow Discount Rate Discounted Cash Flow 0 -$400‚000 0% -$400‚000 1 $100‚000 0% $100‚000 2 $120‚000 0% $120‚000 3 $850‚000 0% $850‚000 Answer: The projects net present value is $670‚000 If the discount rate is 2%‚ what is the
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motors‚ would allow the company to remain in the leisure craft market and utilize its established selling network. To determine which of the two projects are financially more pleasing we need to use calculations to determine the value of the beta‚ WACC‚ NPV and IRR. Fist we want to calculate the net working capital (NWC). The NWC turnover ratio for this new operation was expected to be 6:1.( NWC turnover = Sales/ NWC = 6/ 1 = 3‚500‚000 / NWC. Thus‚ NWC = $ 583‚333.33); then we find the project outboard’s
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1.) Synthetic Resin PP=2+250‚000500‚000 =2.5 yrs. Epoxy Resin PP=1+200‚000400‚000 =1.5 yrs. ***Tim must explain to the board that Payback Method does not consider the cost of the capital (debt/equity) that the project will undertake which is reflected in the cash flow. It only states the length of time the company will be tied up in the project. He should also emphasize that the PBP method ignores the time value of money as well as the cash flows occuring after the payback period
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the above formula‚ A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A Net Present Value: Net present value (NPV) is used to
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that we have been under. Our analysis shows that the Zinser 351 project will yield a Net Present Value of $6‚474‚082.14 million and a discounted payback period of 5.6 years. This project not only brings a big enough payoff as demonstrated by the NPV‚ but also fits our timeline. The discounted payback period indicates that our investment will be realized before our company is not able to recover from our current financial struggles. The Zinser 351 is a project that this company must undertake
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1) Estimate the WACC that is appropriate for discounting the Collinsville plant’s incremental cash flows. You should estimate and present each component of the WACC separately‚ explaining briefly but clearly what assumptions you are making for each of them. In the same spirit‚ estimate the appropriate all-equity cost of capital for the APV-based valuation. WACC calculation. WACC = RD*(1-t)*D/(D+E)+RE* E/(D+E) Cost of equity We assume that risk free rate (Rf) equals rate of long-term Treasury
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Objectives: 1. The basics of incremental-cash-flow analysis: identifying the cash flows relevant to a capital-investment decision 2. The construction of a side-by-side discounted-cash-flow analysis for a replacement decision 3. How to adapt the NPV decision rule to a troubled industry 4. The recognition that a reduced investment horizon is a significant consequence of financial distress 5. The importance of sensitivity analysis to a capital-investment decision Case Questions 1. How
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of Return 18.732% Question 3: Knowing that Torgler wants a return of 12% permits the use of the NPV approach to the problem. We know it will be a positive NPV since Question 2 indicated a IRR greater than 12%‚ but it would still be interesting to know the actual number. Using the cash flow data from the previous question and a discount rate of 12% yields a NPV of SFr 174‚080.56 which is the Present Value of the Inflows = SFr 774‚080.56 less the Present Value of the Outflows (Initial
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before-tax required rate of return for Deer Valley is 14%. Compute the before-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift will be a profitable investment. Show calculations to support your answer. 2. Assume that the after-tax required rate of return for Deer Valley is 8%‚ the income tax rate is 40%‚ and the MACRS recovery period is 10 years. Compute the after-tax NPV of the new lift and advise the managers of Deer Valley about whether adding the lift
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