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Capital budgeting

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File is attached with all questions I need help with.

Thank you SO much for helping me get started...
1) you are considering opening a new plant. The plant will cost $100 upfront and will take a year to build.
after that, it is expected to produce profits of $30 million at the end of every year of production.
The cash flows are expected to last forever.
Calculate the NPV of this investment opportunity if your cost of capital is 8%.
should you make the investment?
Calculate the IRR and use it to determine the maximum deviation allowable in the cost of the capital estimate to leave the decision unchanged.

2)Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5 million.
The product is expected to generate profits of $1million per year for ten years. The company will have to provide product support that will cost $100,000 per year in perpetuity.
Assume all profits and expenses occur at the end of the year.
a) what is the NPV of this investment if cost of capital is 6%? Should the firm undertake the project? Repeat the analysis for discount rates of 2% and 11%.
b) How many IRRs does this investment opportunity have?
c) What does the IRR rule indicate about this investment?

3) You work for an outdoor play structure mftg company and are trying to decide between 2 projects.

Year-End Cash Flows in ($) thousands
Project 0 1 2 IRR
Playhouse -30 15 20 10.40%
Fort -80 39 52 8.60%

You can undertake only 1 project. If your cost of capital is 8%, use the incremental IRR rule to make the correct decision.

Home Builder Supply operates seven retail outlets in Georgia and South Carolina. Management is contemplationg building an eighth retail store across town from its most succesful retail outlet
The company already owns the land for this store, which currently has an abandoned warehouse located on it.
Last month, the marketing dept spent $10,000 on market research to determine the extent of customer demand for new store. Now Home Builder Supply must decide whether to build and open new store.

Which of the following should be included as part of the incremental earnings for the proposed new retail store?
a) cost of land where store will be located
b)cost of demolishing abandoned warehouse and clearing lot
c)loss of sales in the existing retail outlet, if customers who previously drove across town to shope at existing outlet become customers of new store instead.
d)the $10,000 in market research spent to evaluate customer demand
e)Construction costs for new store
f)Value of land if sold
g)Interest expense on debt borrowed to pay construction costs.

5)Elmdale Enteprises is deciding whether to expand its production facilities Although long term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of $)

Year 1 Year 2
Revenues 125 160
Cost of goods and operatin expenses other than depreciation 40 60
Depreciation 25 36
Increase in working capital 5 8
Capital expenditures 30 40
Marginal corporate tax rate 35% 35%

a)What are the incremental earnings for this project for years 1 and 2?

b) What are the free cash flows for this project for first 2 years?

Markov Mftg recently spent $15 million to purchase some equipment used in the manufacture of disk drives.
The firm expects that this equipment will have a useful life of 5 years and its marginal corporate tax rate is 35%.
The company pans to use straight line depreciation.

a)What is the annual depreciation expense associated with this equipment?
b)What is the annual depreciation tax yield?
c) Rather than straight-line, supposes Markov uses MACRS depreciation method for five-year property.
Calculate the depreciation tax shield each year for this eqpmt under this accerelated depreciation schedule.
d) If Markov has a choice between straight-line and MACRS depreciation schedules, and its marginal corporate tax rate is expected
to remain constant ,which should it choose? Why?

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Solution Summary

The solution explains some questions relating to capital budgeting

See Also This Related BrainMass Solution

Cost of Capital, Capital Budgeting, Capital Structure, Forecasting, and Working Capital Management

Please see attachment use word or excel but please show how you got the answer.

Question 1: (Cost of Capital)

You are provided the following information on a company. The total market value is $38 million. The company's capital structure, shown here, is considered to be optimal.
(see attached file for data)

a. What is the after-tax cost of debt? (assume the company's effective tax rate = 40%)
b. Assuming a $4 dividend paid annually, what is the required return for preferred shareholders (i.e. component cost of preferred stock)? (assume floatation costs = $0.00)
c. Assuming the risk-free rate is 1%, the expected return on the stock market is 7%, and the company's beta is 1.0, what is the required return for common stockholders (i.e., component cost of common stock)?
d. What is the company's weighted average cost of capital (WACC)?

Question 2: (Capital Budgeting)

It's time to decide how to use the money your firm is expected to make this year. Two investment opportunities are available, with net cash flows as follows:
(See attached file for data)

a. Calculate each project's Net Present Value (NPV), assuming your firm's weighted average cost of capital (WACC) is 7%
b. Calculate each project's Internal rate of Return (IRR).
c. Plot NPV profiles for both projects on a graph).
d. Assuming that your firm's WACC is 7%:
(1) If the projects are independent which one(s) should be accepted?
(2) If the projects are mutually exclusive which one(s) should be accepted?

Question 3: (Capital Structure)

Aaron Athletics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table:
(See attached file for data)

The company's tax rate, T, is 40 percent. The company uses the CAPM to estimate its cost of common equity, Rs. The risk-free rate is 1 percent and the market risk premium is 6 percent. Aaron estimates that if it had no debt its beta would be 1.0. (i.e., its "unlevered beta," bU, equals 1.0.)

On the basis of this information, what is the company's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure?

Question 4: (Forecasting)

A firm has the following balance sheet:
(See attached file for data)

Sales for the year just ended were $6,000, and fixed assets were used at 80 percent of capacity. Current assets and accounts payable vary directly with sales. Sales are expected to grow by 20 percent next year, the expected net profit margin is 5 percent, and the dividend payout ratio is 80 percent.

How much additional funds (AFN) will be needed next year, if any?

Question 5: Working Capital Management

The Chickman Corporation has an inventory conversion period of 60 days, a receivables collection period of 30 days, and a payables deferral period of 30 days. Its annual credit sales are $6,000,000, and its annual cost of goods sold (COGS) is 60% of sales.

a. What is the length of the firm's cash conversion cycle?
b. What is the firm's investment in accounts receivable?
c. What is the company's inventory turnover ratio?
d. Identify three ways in which the company could reduce its cash conversion cycle?
e. What are the possible risks of reducing the cash conversion cycle per your recommendations in part d?

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