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# Capital Budgeting

### Replacement decision: Prepare a relevant cost schedule showing the benefit of buying the new mixer

The managers of ABC co. are considering replacing an industrial mixer used in the company's factory. The company's cost of capital is 10%. Information about the old mixer: Cost: \$28,000 Estimated useful life: 10 yrs Estimated residual value: 0 current age: 5 years estimated current fair value: \$8,000 Annual operating co

### Required Return, Profitability Index, and NPV

Chapter 7 Practice Problems 16 & 25 16. IRR. Marielle Machinery Works forecasts the following cash flows on a project under consideration. It uses internal rate of return rule to accept or reject projects. Should this project be accepted if the required return is 12 percent? C0 C1 C2 C3 -\$10,000 0 +\$7,500 + \$8,500

### Capital budgeting analysis -

A project in South Korea requires an initial investment of 2 billion South Korean won. The project is expected to generate net cash flows to the subsidiary of 3 billion and 4 billion won in the two years of operation, respectively. The project has no salvage value. The current value of the won is 1,100 won per US dollar, and th

### Financial Terms

Can you assist with the definitions of these? Thanks. FINANCE EFFICIENT MARKET PRIMARY MARKET SECONDARY MARKET RISK SECURITY STOCK BOND CAPITAL DEBT YIELD RATE OF RETURN RETURN ON INVESTMENT CASH FLOW

### Buena Terra Corporation - Residual Distribution Model

Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a \$3.00 dividend per share (DPS) for the past several years, and its share holders expect the dividend to remain constant for the next several years. The company's target capital structure is 60% equity 40% debt it has 1,000,000 hares of

### Present Value of a Lump Sum: Example Problem

Find the present value of a 3-year, \$20,000 ordinary annuity deposited into an account that pays 12 percent interest, compounded monthly. Solve for the present value of the annuity in the following ways: a. As three single cash flows discounted at the stated rate of interest b. As three single cash flows discounted at the ap

### Present Value of a Lump Sum

P3-21. You plan to invest \$2,000 in an individual retirement arrangement (IRA) today at a stated interest rate of 8 percent, which is expected to apply to all future years. a. How much will you have in the account at the end of 10 years if interest is compounded as follows? (1) Annually (2) Semiannually (3) Daily (assume

### Present Value of a Lump Sum

P3-18. Landon Lowman, star quarterback of the university football team, has been approached about forgoing his last two years of eligibility and making himself available for the professional football draft. Talent scouts estimate that Landon could receive a signing bonus of \$1 million today along with a 5-year contract for \$3 mi

### Cash Flow Data - IRR

Seely Enterprises is considering a project that has the following cash flow data. What is the project's IRR? Year: 0 1 2 3 Cash Flows: -\$1,000 \$450 \$450 \$450

### Payback and Net Present Value

X-treme Vitamin Company is considering two investments, both of which cost \$10,000. The cash flows are as follows: Year Project A Project B 1 . . . . . . . . . . \$12,000 \$10,000 2 . . . . . . . . . . 8,000 6,000 3 . . . . . . . . . . 6,000 16,000 a. Which of the two projects should be chosen based on the payback method? b

### NPV at The Danforth Tire Company

The Danforth Tire Company is considering the purchase of a new machine that would increase the speed of manufacturing and save money. The net cost of this machine is \$66,000. The annual cash flows have the following projections. Year Cash Flow 1. . . . . . . . . \$21,000 2. . . . . . . . . 29,000 3. . . . . . . . . 36,000 4.

### What is the profitability index for an investment with the following cash flows given a 9 percent required return?

What is the profitability index for an investment with the following cash flows given a 9 percent required return? Year Cash Flow 0 -\$21,500 1 \$ 7,400 2 \$ 9,800 3 \$ 8,900 (answer format x.xx or .xx)

### Evaluation of project proposal

Please see attachment. You are in the finance department of a firm and you are evaluation a project proposal. You have the developed the following financial projections and you are calculating: a. The incremental cash flows of the project. b. The net present value of the project given a discount rate of 15%. The cor

### A food company called 'Granny's Choice' wants to introduce a new computer system for its perishable products warehouse.

A food company called 'Granny's Choice' wants to introduce a new computer system for its perishable products warehouse. The costs and benefits are as follows: Years Costs Benefits 1 33,000 21,000 2 34,600 26,200 3 36,300 32,700 4 38,100 40,800 5 40,000 51,000 6 42,000 63,700 a)Given a discount rate of 8 percent (0.08

### IRR - Marielle Machinery Works forecasts the following cash flows on a project under consideration.

Marielle Machinery Works forecasts the following cash flows on a project under consideration. It uses the internal rate of return rule to accept or reject projects. Should this project be accepted if the required return is 12 percent? Co - \$10,000/ C1 0/ C2+\$7,500 / C3 + \$8,500

### Net Present Value NPV, Stock Valuation, Issuing New Equity

Walton Industries, Inc. (WII), has 10,000 shares of common stock outstanding, and the current price of the stock is \$100 per share. The firm does not have any debt. The CEO discovs an opportunity in a new project that produces positive net cash flows with a present value of \$210,000. The total initial costs for investing and dev

### Evaluating Capital Investments, Estimating Cash Flows, Net Present Value, IRR

Please see attached file. 1. Fisher Electronics (FE) was considering the introduction of a new product that had 5 years of life and was expected to generate sales in Year 1 through 5 as the following: Year 1 Year 2 Year 3 Year 4 Year 5 \$10,000, 000 \$13,000,000 \$13,000,000 \$8,667,000 \$4,333,000 No material levels of reve

### Describe the different ways in which capital can be transferred from suppliers of capital to those who are demanding capital.

Describe the different ways in which capital can be transferred from suppliers of capital to those who are demanding capital.

### The more frequent the compounding, the higher the future value, other things equal.

This is also attached as a document The more frequent the compounding, the higher the future value, other things equal. a. True b. False 2. For a given amount,the lower the discount rate,the less the present value. a. True b. False 3. Systematic Risk can be totally elimi

### Investment: The Internal Rate of Return

Please use Excel showing a cash flow time line to provide the internal rate of return on an investment with the following cash flows: Year Cash Flow 0 -\$123,400 1 \$36,200 2 \$54,800 3 \$48,100

### Calculate the present value of \$25,000 20 years from today.

Calculate the present value of \$25,000 20 years from today based on the following annual discount rates: a. 3 percent b. 6 percent c. 9 percent

### Investments and Wealth Creation

General Electric Corporation and Tyco International are both classified as "conglomerates" (having many diversified business lines). General Electric has pursued a conservative growth strategy by focusing on being the number one or number two in each industry where it competes. Tyco has pursued very aggressive sales and earning

### Home Security Systems is analyzing the purchase of manufacturing equipment that will cost \$40,000.

Please see attached document. Question 1 Home Security Systems is analyzing the purchase of manufacturing equipment that will cost \$40,000. The annual cash inflows for the next three years will be: Year Cash Flow 1......................... \$20,000 2..........................\$18,000 3..........................\$13,0

### NPV, IRR for a merger

Two companies are contemplating a merger. The new entity is expected to require an initial investment of \$20 million which will then result in expense savings of \$2.7 million for 15 years. The weighted average cost of capital is 8%. The firm just issued bonds at 6.5%. How would we determine the NPV / IRR for this effort.

### Payback period and capital-budgeting technique

Study Question 9-2 on page 286 What are the criticisms of the use of payback period as a capital-budgeting technique? What are its advantages? Why is it so frequently used? Study Problem 9-5 You are considering a project with an initial cash outlay of \$80,000 and expected free cash flows of \$20,000 at the end of the y

### Project Evaluation Process and Time Value of Money

Describe the following project evaluation processes: Payback, NPV, PI, IRR. Is any one evaluation process better the others? Why? 2. Group "A" will use 4% factors A) Calculate the Future value of \$400 compounded annually for 5 years. B) Calculate the Future value of \$400 compounded semi-annually for 5 years. C)

### Mini Case on Pay-back Period

The pay-back period is the least accurate method of evaluating a capital expenditure. Why is it used so often? Mini Case: Your organization is going to purchase (lease) a new copy machine. You have scheduled presentations from sales representatives from four competing companies. It is your job to compile a list of questions

### Net Present Value, Internal Rate of Return, Profitability Index, Payback Period, Discount Payback Period, and Modified Internal Rate of Return

Evaluate the following 3 projects with all of the 6 capital budgeting tools (Net Present Value, Internal rate of Return, Profitability Index, Payback Period, Discount Payback Period, Modified Internal rate of Return). Which projects would you approve? If you could do only one (assume the most you have to invest is \$500), which

### Internal Rate of Return for Marielle Machinery Works

IRR. Marielle Machinery Works forecasts the following cash flows on a project under consideration. It uses the internal rate of return to accept or reject projects. Should this project be accepted if the required return is 12%? C 0= \$-10,000, C 1=0, C2 = +\$7,500, C 3= +\$8,500

### Profitability Index versus NPV

Profitability Index versus NPV. Consider these two projects: Project C 0 C 1 C 2 C 3 A -\$36 +\$20 +\$20 +\$20 B - 50 + 25 + 25 + 25 A. Which project has the higher NPV if the discount rate is 10 percent? B. Which has the higher profitability index? C. Which project is most attractive to a firm that can raise an unl