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Capital Budgeting, Stock Split, Credit terms

1.Two fellow financial analysts are evaluating a project with the following net cash flows:

Year Cash Flow
0 -$ 10,000
1 100,000
2 -100,000

One analyst says that the project has an IRR of between 12 and 13 percent. The other analyst calculates an IRR of just under 800 percent, but fears his calculator's battery is low and may have caused an error. You agree to settle the dispute by analyzing the project cash flows. What is the IRR for the project? Are there any special concerns with the analysis of this project using the IRR method?

2. Coach Inc. is considering the following mutually exclusive projects:

Project A Project B
Year Cash Flow Cash Flow
0 -$5,000 -$5,000
1 200 3,000
2 800 3,000
3 3,000 800
4 5,000 200

At what cost of capital will the net present value of the two projects be the same? (That is, what is the "crossover" rate?)

3. Costco recently announced a 3-for-1 stock split. Prior to the split, the company's stock was trading at $90 per share. The split had no effect on the wealth of the company's investors. What will be the new stock price?

4. Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37 percent. But since your firm is not taking discounts and is paying on Day 20, what is the effective annual cost of your firm's current practice, using a 365-day year?

Solution Summary

Answers to questions on Capital Budgeting(IRR, Mutually Exclusive Projects, Crosover rates), Stock Split, Credit terms.