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# Capital Budgeting

### Net present value and internal rate of return for capital budgeting

I HAVE A PROJECT WITH THE FOLLOWING EXPECTED CASH FLOWS Year Cash Flow 0 -\$550,000.00 1 \$90,000.00 2 \$100,000.00 3 \$470,00.00 If I have the following discount rates what is the project's net present value and IRR? 0% THIS IS WHAT I DON"T KNOW I figured out the NPV

### Capital budgeting

Why is it important to identify the incremental cash flows in the context of calculating the NPV for capital budgeting purposes? Are you ready to put your knowledge to test by working on the following exercise? Which of the following should be treated as incremental cash flows when computing the NPV of an investment? a. A re

### Forecasted Dividend Payout (Multichoice)

Blease Inc. has a capital budget of \$625,000, and it wants to maintain a target capital structure of 60% debt and 40% equity. The company forecasts a net income of \$475,000. If it follows the residual dividend policy, what is its forecasted dividend payout ratio? A. 40.61% B. 42.75% C. 45.00% D. 47.37% E. 49.74%

### Distributions to Shareholders: Dividends and Repurchases

Brammer Corp.'s projected capital budget is \$1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is \$550,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out? A. \$122,176 B. \$128,606 C. \$135,375 D. \$142,500 E. \$150,000

### FINANCIAL VALUES

Superior Manufacturing is thinking of launching a new product. The company expects to sell \$950,000 of the new product in the first year and \$1,500,000 each year thereafter. Direct costs including labor and materials will be 55% of sales. Indirect incremental costs are estimated at \$80,000 a year. The project requires a new

### Modified Rate of Return

A company's project has expected net cash inflows of \$4,000 per year for seven years. The project has a cost of \$12,200 and the cost of capital is 17%. What's the project's modified internal rate of return?

### Present Value/IRR

The Zero Machine Company is evaluating a capital expenditure proposal that requires an initial investment of \$20,960 and has predicted cash inflows of \$5,000 per year for 10 years. It will have no salvage value. Required: a. Using a required rate of return of 16%, determine the net present value of the investment proposa

### ABC Inc. is considering investing in a new machine.

ABC Inc. is considering investing in a new machine. If it purchases the machine, annual cash revenues will increase by \$125,000 whereas annual cash expenses will increase by \$70,000. The machine costs \$85,000 and has a useful life of 5 years. The tax rate is 34% and ABC Inc desires a 20% rate of return. A) Compute the net pres

### Mixed Managerial Accounting Problems

Refresher Managerial Accounting Sample Problems - show all your work in detail. 1. Darien Industries operates a cafeteria for its employees. The operation of the cafeteria requires fixed costs of \$4,700 per month and variable costs of 40% of sales. Cafeteria sales are currently averaging \$12,000 per month. Darien has an oppor

### NPV and Internal Rate of Return

There are two cash flows C1 = {-100,30,30,30,30,30} and C2 = {-150,42,42,42,42,42}. r = 0.05 NPV of C1 = 29.88 NPV of C2 = 31.84 IRR of C1 = 15.2% IRR of C2 = 12.4% Which cash-flow do you prefer?Can you thick of scale-free measures of comparison?

### Finance: Preparing a Cash Budget

Express Company has budgeted sales for the first quarter of next year as follows: January \$240,000 February \$280,000 March \$320,000. Sales are 70% credit and 30% cash. Credit sales are collected 80% in the month following sales and 20% in the second month following the sale. Cost of Goods is 65% of sales. Express Company desire

### Calculate the internal rate of return

Nina Roberts has the opportunity to invest in a timber forest. She would have to invest \$100,000. Revenues of \$20,000 per year are projected for 20 years. However, these revenues will not begin coming in for five years because the timber must be seasoned before cutting and selling can begin. Ms. Roberts's hurdle rate is 10%. Ig

### Capital Budgeting Reliance on Analysis of Cash Flows

1. Why does capital budgeting rely on analysis of cash flows rather than on net income? 2. What is normally used as the discount rate in the net present value method? 3. Have you ever heard of the replacement decision? 4 Does capital budgeting deals with actual dollars?

### Internal Rate of Return and Net present value

Teddy Bear Planet, Inc. has a project with the following cash flows: Year Cash Flows (\$\$) 0 -8,000 1 4,000 2 3,000 3 2,000 A). Compute the internal rate of return B). Suppose th

### Microsoft Bonds

Base your answers on information from the most current bond and stock quotations from The Wall Street Journal, a Standard & Poor's Bond Guide, bondsonline.com, or another reliable bond information source. ? How is Microsoft's bonds listed? How many bond issues does the company currently have listed on the bond market and wha

### Internal Rate of Return Methods

Julie Kowalis, an investment analyst, wants to know if her investments during the past four years have earned at least a 12% return. Four years ago, she had the following investments: a. She purchased a small building for \$50,000 and rented space in it. She received rental income of \$8,000 for each of the four years and the

### Internal Rate of Return and NPV Calculations

(a) A capital investment requiring one initial cash outflow is forecast to operating profits (cash) as follows Year 1 \$74,000 Year 2 \$84,000 Year 3 \$96,000 Year 4 \$70,000 The investment has an NPV of \$20,850 based on a required rate of return of 12%. Calculate the payback period of the investment. (b) The initi

### Capital Investment Decision for Campus Print Shop

Campus Print Shop is thinking of purchasing a new, modern copier that automatically collates pages. The machine would cost \$22,000 cash. A service contract on the machine, considered a must because of its complexity, would be an additional \$200 per month. The machine is expected to last eight years and have a resale value of \$4,

### NPV, Internal Rate of Return (IRR), and Discount Rates

I'm getting ready to start a Finance class. I'm reading ahead in the book to try and prepare myself for the course. I have a 4.0 GPA and really want to maintain it through graduation; however, this finance book seems like it is pretty daunting! I'm trying to understand these concepts and there are a few problems that I would lik

"Caladonia Products" Integrative Problem Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows: YEAR PROJECT A PROJECT B 0 -\$100,000 -\$100,000 1 32,000 0 2 32,000 0 3 32,000

The acceptance of a capital budgeting project is usually evaluated on its own merits. That is, capital budgeting decisions are treated separately from capital structure decisions. In reality, these decisions may be highly interwoven. This may result in: A. firms rejecting positive NPV, all equity projects because changing to

### Present Value and Capital Budgeting

Why is the present value important for understanding capital budgeting? Which is the best present value method and why?

### NPV/Discount Payback Period

The new project has a cost of \$52,125, its expected net cash inflows are \$12,000 per year for 8 years, and its cost of capital and its cost of capital is 12 percent. What is the project's discount period and NPV

### Present Values

Present Values. Compute the present value with the information provided below. Cash flow \$137 a. rate 5% time 13 yrs b. rate 7% time 14 yrs c. rate 9% time 17 yrs d. rate 11% time 20 yrs

### Debt-Equity - Budgeting

1. A firm has \$ 4 millions in total assets and 2.2 millions in equit. How much of its \$500,000 capital budget should be debt-financed to retain the same debt-equity ratio? 2. A firm has an unused machine that originally cost \$75,000, has a book value of \$20,000 and is currently worth \$25,000. Ignoring taxes, the correct oppo

### Relevant annual after-tax cash flow

ABC Corp is considering the various benefits that may result from the shortening of its products cycle by changing from the company's present manual system to a computer-aided design / computer-aided manufacturing (CAD/CAM) system. The proposed system can provide productive time equivalence close to the 20,000 hours currently av

### Steps to Formulating Operation Budgeting

Nathan's Place, open 365 days, consists of an 100 room motel with a 50 seat restaurant shop. Nathan Harris provides you with the following information: 1. Of the 100 rooms, 80 are doubles and 20 are singles. 2. The doubles are sold for \$65 each and the singles are sold for \$50 each. 3. Forecasted oc

### End of year cash flows

The Walker Landscaping Company can purchase equipment on sale for \$3,200. The asset has a two-year life, will produce a cash flow of \$800 in the first year, and \$3,000 in the second year. The interest rate is 15%. REQUIRED: 1) Assuming end of year cash flows, calculate the project's: a) the project's payback, b) IRR and c) NP

### Present value of salary arrangement

You have just joined a regional investment banking firm. They have offered you two different salary arrangements. You can have \$81,000 per year for the next 3 years or \$60,000 per year for the next 3 years, along with a \$50,000 signing bonus today. If the market interest rate is 16%, what is the present value of the best salary

### Capital Budgeting and Cash Flow Estimation

11-12 Capital Budgeting and Cash Flow Estimation After seeing Snapple's success with noncola soft drinks and learning of Coke's and Pepsi's interest, Allied Food Products has decided to consider an expansion of its own in the fruit juice business. The product being considered is fresh lemon juice. Assume that you were recen