1. Dandy Product's overall weighted average required rate of return is 10%. Its yogurt division is riskier than average, its fresh produce division has average risk, and its institutional foods division has below-average risk. Dandy adjusts for both divisional and project risk by adding or subtracting 2% points. Thus, the ma
The Karns Oil company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project would cost $8million today. Karns estimates that once drilled, the oil will generate positive net cash flows of $4million a year at the end of each of the next four years. While the compa
Explain how the bond-refunding problem is similar to a capital budgeting decision? If common stockholders are the owners of the company, why do they have the last claim on assets and residual claim on income? As an investor which type of security would you prefer to own and why?
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 pr
Why does capital budgeting rely on analysis of cash flows rather than on net income? What does the term mutually exclusive investments mean? If corporate managers are risk-averse, does this mean they will not take risks? Explain. Explain how the concept of risk can be incorporated into the capital budgeting process.
Borden Books is interested in purchasing a computer system to use for the next 10 years. Currently, Borden is considering two mutually exclusive systems, System S and System L. System S has an up-front cost of $3 million at t = 0 and will produce positive cash flows of $2.5 million per year for two years (at t = 1 and 2).
Johnson Jets is considering two mutually exclusive machines. Machine A has an up-front cost of $100,000 (CF0 = -100,000) and produces positive after-tax cash inflows of $40,000 a year at the end of each of the next six years. Machine B has an up-front cost of $50,000(CF0 = -50,000) and produces after-tax cash inflows of $3
Consider the following project cash flows Year Project A Project B 0 investment -$200 -$300 1 60 200 2 70 100 3 80 100 4 80 1. Calculate the NPV of each project. Which project should be chosen if opportunity cost is 11%? 2. IRR. What are the internal rates of return on projects A and B? Please show all computat
I know that the company should accept the project, but what about the time value of money? If you include this into the analysis would you still accept the project or reject it and why?
Frank is looking at a new sausage system with an installed cost of $483,600. This cost will be depreciated straight-line to zero over the project's 5-year life, at the end of which the sausage system can be scrapped for $74,400. The sausage system will save the firm $148,800 per year in pretax operating costs, and the system req
How do time value of money concepts assist a company in making capital budgeting decisions?
1. Refer to the cash flows (projects A&B) in the table: a. If the opportunity cost of capital is 11percent, which of these projects is worth pursuing. b. Which project would you choose if the opportunity cost of capital were 16 percent? c. What are the internal rates of return on projects A and
Consider the following project cash flows: Year ......................Project A...........Project B 0 investment.............-$200..............-$300 1...................................60..................200 2...................................70..................100 3...................................80..............
1) Define the following terms: a) Sunk Cost b) Opportunity cost c) Allocated cost 2) Is the following statement true or false. If the statement is true, where or how are these costs reflected? "Financing costs should be ignored when estimating a project's relevant cash flows." 3) List and discuss items included in a p
1) Your author offers four alternatives to the NPV rule. List and discuss these four alternatives. 2) When two mutually exclusive projects give conflicting acceptance indicators, how should the manager resolve the conflict? 3) Two projects have the expected cash flows shown below. The projects have similar risk characte
Discuss the importance of having a working capital policy. Discuss why businesses spend time and effort and money to produce forecasts? In addition, discuss how the cash budget and capital budget relate to pro forma financial statement preparation.
# 1. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year for 20 years. Find the internal rate of return to the nearest whole percentage point. The answer is 11%. my calculations did not get this can you please explain how to solve the problem step b
The modified IRR (MIRR) method overcomes the problems of cash flow timing and project size that lead to criticism of the regular IRR method A) true B) false (correct) A 10-year corporate bond has an annual coupon payment of 9 percent. The bond is currently selling at par ($1,000). Which of the following statements is most c
18. You are thinking about acquiring a new company. The company is at a bargain asking price of $400,000. You have your expert accountants project a 10 year income statement (see below) based on how well you think you could run this new venture. Now you need to project a ten year cash flow and determine if you should acquire t
1. Barkley finances only with retained earnings, and it uses the CAPM with a historical beta to determine its cost of equity. The risk-free rate is 7%, and the market risk premium is 5%. Barkley is considering a project that has a cost at t=0 of $2,000 and is expected to provide cash inflows of $1,000 per year for 3 years. Wh
The director of capital budgeting for Giants Inc. has identified two mutually exclusive projects, L and S, with the following expected net cash flows: Expected Net Cash Flows Year Project L Project S 0 ($100) ($100) 1 10 70 2 60 50
(See attached file for full problem description) --- Problem 7-9 NPV and IRR. A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years. Is this project worth pursuing if the discount rate is 10 percent? Project NPV How high can the discount rate be before y
Problems Ch. 10-4 & 10-6 are attached with powerpoint assistance. Also, the problems below can be answered with financial condition section of the management discussion found in IBM's 2001 Annual Report. The attached financial condition starts with first page paragraph statement "During 2001, the company continued to demonst
Use the following list of risk management tools and describe the circumstances under which they would be applied to the risk categories of corporate (including risk associated with acquisition analysis and capital budgeting), economic, foreign currency, political, and other relevant global business risks. 1. Black-Scholes opt
Consider the following two mutually exclusive projects: whichever project you choose you require a 15% return on your investment. Round answers (a-d) to two decimal places and (e) to three decimal places. Year Cash Flow (A) Cash Flow (B) 0 -$29
Johnson Jets is considering two mutually exclusive machines. Machine A has an up-front cost of $100,000 (CF0 = -100,000), and produces positive after-tax cash inflows of $40,000 a year at the end of each of the next six years. Machine B has an up-front cost of $50,000(CF0 = -50,000) and produces after-tax cash inflows of $30,
Problem A: Try evaluating the following projects with all of the basic capital budgeting tools, in other words, which project would you pick as the best: Projected Cash Flow Years 0 1 2 3 4 5 Project A (500) 45 55 65 175 185 Project B (250
Determine the payback period, discounted payback period, NPV, profitability index, IRR from sample #1 attached Use the following data to for 1,2,3 4,5 below: Undiscounted Year Free cash flows 0 (350,000) 1 10,000 2 40,000 3 80,000 4 100,000 5 120,000 6 80,000 7 100,000 Required rate of return = 8% 1. The payback p
Assume you are starting a new business. Write a half page explanation of the difference between budgeting and forecasting and the purpose of each. Create an example of a budget and an example of a forecast using imaginary numbers from your start-up business. Your budget and your forecast should contain income(sales of product