On Your Mark is considering purchasing new manufacturing equipment that costs $1,300,000 and is expected to improve cash flows by $500,000 in year 1, $350,000 in year 2, $475,000 in year 3, $450,000 in year 4, and $300,000 in year 5.

Key financial metrics for this capital budgeting project have been calculated and provided by the Finance department (see below). A 14% rate of return and a payback period of less than five years are required for the project. These key metrics must include (1) payback period, (2) net present value, and (3) internal rate of return. (Use 6% as the weighted average cost of capital).

The On Your Mark problem listed above is apparently identical to the following Student Marks problem.

Strident Marks is considering purchasing new manufacturing equipment that costs $1,300,000 and is expected to improve cash flows by $500,000 in year 1, $350,000 in year 2, $475,000 in year 3, $450,000 in year 4, and $300,000 in year 5.
Calculate key financial metrics for this capital budgeting project. Assume a 14% rate of return for the project. These key metrics must include

(1) payback period, (2) net present value, (3) internal rate of return and (4) modified rate of return. (Use 6% as the finance rate, and 14% as the reinvest rate.)

The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions.
The firm's investment decisions would generally include expansion, acquisition, modernisation and replacement of the long-term assets.
Sale of a division or business (divestment) is also as an investment decision.
Decisions like the change in the methods of sales distribution, or an advertisement campaign or a research and development programme
have long-term implications for the firm's expenditures and benefits, ...

Solution Summary

This discusses the metrics of whether to accept or reject the project in about 700 words with references.

The new financial analyst does not like the paybak approach in - 35091 - and determines that the firm's required rate of return is 15 %. His recommendation would be to _________
acceptprojects A & B, acceptproject A & reject B, reject A & accept B, or reject both
The following is the case - 35091 -
A firm is eva

XYZ has an asset beta of 1 and a cost of capital of 15%. A new project is being explored with a beta of .2 and an IRR of 10%. Inserting theprojects beta into the CAPM reveals a return of 5% based on project risk. Should the firm accept or rejecttheproject? Explain.

A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:
Project "A" - Initial Investment = $40,000 & End-of-Year Cash Flows = $60,000
Project "B" - Initial Investment = $90,000 & End-of-Year Cash Flows = $160,000
If the firm above has a required payback o

You are considering 2 independent projects with the following cash flows. The required return for both projects is 16 percent. Given this information which one of the following statements is correct?
year Project A Project B
0 -$125,000 -$135,000

A project has annual cash flows (including the initial year) of -160,000, 70,000, 55,000, 70,000, 60,000, and 45,000, and a discount rate of 11%. The company should:
a. Accepttheproject because it will increase shareholder wealth.
b. Rejecttheproject because it will reduce shareholder wealth.
c. Rejectthe pr

An increase in the firm's WACC will decrease projects' NPVs, which could change theaccept/reject decision for any potential project. However, such a change would have no impact on projects' IRRs. Therefore, theaccept/reject decision under the IRR method is independent of the cost of capital.

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of theproject. Neither project has any salvage value.
Reference: 06_02
Project A

BMI is considering a project that has a cost of $33,578.17 and it's expected net cash inflows are $12,000 per year for 4 years. What is theproject's IRR?
10%
13%
16%
18%
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A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of return are as f

Explain the following. A company estimates that an average-risk project has a cost of capital of 8 percent, a below-average risk project has a cost of capital of 6 percent, and an above-average risk project has a cost of capital of 10 percent. Which of the following independent projects should the company accept? Project A has b

Given the cash flows for projects S and L, which are MUTUALLY EXCLUSIVE projects, compute the capital budgeting metrics and based on your computations then recommend the best project. Cost of capital for both projects is 10%.
Project S Project L
0 -$2,000 -$1,650
1 $1,700 $600
2 -$400 $900
3 $600 -$175
4 $450 $800