# Finance: Capital budgeting.

I need help with the problem down below.

Thanks in advance.

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Part 1. Capital Budgeting Practice Problems

a. Consider the project with the following expected cash flows:

Year Cash flow

0 - $400,000

1 $100,000

2 $120,000

3 $850,000

* If the discount rate is 0%, what is the project's net present value?

* If the discount rate is 2%, what is the project's net present value?

* If the discount rate is 6%, what is the project's net present value?

* If the discount rate is 11%, what is the project's net present value?

* What is this project's modified internal rate of return?

Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. Connect the four points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?

[You can't upload the graph unto Coursenet. Look at the graph you draw and write a short paragraph stating what the graph 'shows"]

b. Consider a project with the expected cash flows:

Year Cash flow

0 -$815,000

1 $141,000

2 $320,000

3 $440,000

What is this project's internal rate of return?

If the discount rate is 1%, what is this project's net present value?

If the discount rate is 4%, what is this project's net present value?

If the discount rate is 10%, what is this project's net present value?

If the discount rate is 18%, what is this project's net present value?

Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. Connect the four points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?

Observe the graph and write a short paragraph stating what the graph 'shows

c. A project requiring a $4.2 million investment has a profitability index of 0.94. What is its net present value? (Remember: Profitability Index is defined as Present Value of the proceeds divided by the initial investment)

Part 2.

Read the article linked below. Then write a one-to-two page paper answering the following question:

http://proquest.umi.com/pqdweb?index=0&did=290623921&SrchMode=1&sid=4&Fmt=4&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1195597756&clientId=29440&cfc=1

Which method do you think is the better one for making capital budgeting decisions - IRR or NPV?

Defend your answer with references to the background materials.

Abstract:

Internal rate of return (IRR) is the flip side of net present value (NPV) and is based on the same principles and the same math. NPV shows the value of a stream of future cash flows discounted back to the present by some percentage that represents the minimum desired rate of return, often a company's cost of capital. IRR, on the other hand, computes a break-even rate of return. It shows the discount rate below which an investment results in a positive NPV and above which an investment results in a negative NPV. It is the breakeven discount rate, the rate at which the value of cash outflows equals the value of cash inflows.

https://brainmass.com/business/capital-budgeting/finance-capital-budgeting-405172

#### Solution Summary

The problem set deals with estimating the net present value, internal rate of return and NPV profile of provided financial information.

Finance: Capital Budget Process

Need to see step by step equation solutions.

Data:

rd= 10%

T= 40%

FX1= 96.57 ¥

FX0= 95.72 ¥

Dps= 139.19 ¥ per share, selling at 1,000 ¥ per share; the underwriting cost is 7%, or 70 ¥

Pn= 930 ¥

Original Bond Yield: 12%

Risk Premium: 1.5%

rRF= 5%

RPM= 6.5%

bi= 1.75

RPW= 3.83%

biW= 1.44

n = 3 years

CF1= -300,425 ¥

CF2= -60,190 ¥

CF3= 210,515 ¥

Inventory Increases = 455,000 ¥

A/R Increases = 890,000 ¥

A/P & Current Liabilities Increases = 1,375,000 ¥

Net Operating Profits = 12,565,235 ¥

Net Fixed Assets = 11,730, 275 ¥

NOCF3= 70,165 ¥

g = 185%

S3= 90,175 ¥

Fixed Costs = 845,000 ¥

Variable Costs per Unit = 55 ¥

P = 110 ¥

BE = 10425 Units

Payback Period = 2.35 Years

Questions:

1.Calculate the After Tax Cost of Debt for a domestic-only company

2.Calculate the After Tax Cost of Debt for an internationally-based company with debt denominated in a foreign currency

3.Compare & Contrast the Cost of debt for a domestic-based with an international-based company. What do the numbers tell you about doing business internationally as opposed to domestically?

4.Calculate the Cost of Preferred Stock

5.Calculate the Cost of Equity using the Company Bond Yield, Risk Premium Approach, then calculate the Cost of Equity using the [domestic-only] CAPM, and then calculate the Cost of Equity using the Global CAPM

6.Contrasting & comparing the three values for the cost of equity should provide insight into the accuracy of forecasting & valuating the companyâ??s equity. What are those insights?

7.Calculate the Weighted Average Cost of Capital using both the domestic-only and then the international-based CAPM. (Use the little chart I made for you in the Capital Budget Process document. Itâ??s easier to organize the work this way.)

8.Calculate the NPV and IRR for this project.

9.Calculate the Net Operating Working Capital, Free Cash Flow, and salvage value for the project.

10.Calculate the break-even point for this project. Then, if the company were to set the break-even point, and wanted to know at what price they should set the commodity to achieve that break-even point, calculate the price at the company-set break-even point. If the industry average units per year manufactured is 5,000 units annually, is this an efficient operation? Why or why not?

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