# Capital Budget

I have read my assigned chapter thoroughly however; I am lost on the attached problems.

1.

Calculate in the net present value and profitability index of a project with a net investment of $20,000 and expected net cash flows of $3,000 a year for 10 years if the project's required return is 12 percent. Is the project acceptable?

2.

A firm wishes to bid on a contract that is expected to yield the following after-tax net cash flows at the end of each year:

Year Net Cash Flow

1 $5,000

2 8,000

3 9,000

4 8,000

5 8,000

6 5,000

7 3,000

8 $-1,500

To secure the contract, the firm must spend $30,000 to retool its plant. This retooling will have no salvage value at the end of the 8 years. Comparable investment alternatives are available to the firm that earns 12 percent compounded annually. The depreciation tax benefit from the retooling is reflected in the net cash flows in the table.

a. Compute the project's net present value.

b. Should the project be adopted?

c. What is the meaning of the computed net present value figure?

6.

Two mutually exclusive investment projects have the following forecasted cash flow:

Year A B

0 $-20,000 $-20,000

1 10,000 0

2 10,000 0

3 10,000 0

4 10,000 0

a. Compute the internal rate of return for each project.

b. Compute the net present value for each project if the firm has 10 percent cost of capitol

c. Which projects should be adopted? Why?

13.

Note the following information on the annual cash flows of two mutually exclusive projects under consideration by Wan Food Markets, Inc.

Year A B

0 $-30,000 $-60,000

1 10,000 10,000

2 10,000 10,000

3 10,000 10,000

4 10,000 10,000

5 10,000 10,000

Wang requires a 14 percent rate of return on projects of this nature.

a. Compute the NPV of both projects

b. Compute the internal rate of return on both projects

c. Compute the profitability index of both projects

d. Compute the payback period on both projects

e. Which of the two projects, if either, should Wang accept? Why?

9.

A junior executive is fed up with his boss's operating policies. Before leaving the office of his angered superior, the young man suggests that a well-trained monkey could handle the trivia assigned to him. Pausing a moment to consider the import of this closing statement, the boss is seized by the thought that this must have been in the back of her own mind ever since she hired the junior executive. She decides to consider replacing the executive with a bright young baboon. She figures that she could argue strongly to the board that such "capitol deepening" is necessary for the cost-conscious firm. Tow days later, a feasibility study is completed, and the following data are presented to the president:

? It would cost $12,000 to purchase and train a reasonably alert baboon with a life expectancy of 20 years.

? Annual expenses of feeding and housing the baboon would be $4,000

? The junior executive's annual salary is $7,000 (a potential saving if the baboon is hired).

? The baboon will be depreciated on a straight-line basis over 20 years to a zero balance.

? The firm's marginal tax rate is 40 percent

? The firm's current cost of capital is estimated to be 11 percent

10.

Consider a 2-year project with the following information: initial fixed asset investment= $495,000; straight-line depreciation to zero over the 2-year life; zero salvage value; selling price =$39; variable costs = 20; fixed cost = $210,000; quantity sold = 150,000 units; tax rate = 31 percent. How sensitive is Operating Cash Flow to changes in quantity sold? State your answer in terms of a dollar amount change (increase or decrease) in Operating Cash Flow for every additional unit sold

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