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# Capital Budgeting

### Choosing Trucks by Comparing NPV and IRRs

Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to opera

### Capital Budgeting

Given the following project cash flows, identify the correct statement(s). The firm's cost of capital is 15%. Cash Flow 0 -50 1 150 2 75 3 -10 I. This project will have two IRRs. II. The NPV of the project is \$180.57. III. The profitability index of the project is 2.61. IV. The payback period of

### 1) Calculating yield and years till maturity 2) Analyze the risk of a portfolio 3) Calculate IRR 4) Calculate NPV and IRR 5) Calculate project cash flows, NPV, and IRR 6) Calculate the Weighted Average Cost of Capital 7) Determine the capital structure of a firm 8) Analyze an IPO 9) Calculate break-even points 10) Calculate and analyze the degree of operating leverage

1) Calculating yield and years till maturity Fill in the table below for the following zero coupon bonds. The face value of each bond is \$1,000. Yield to Price Maturity Maturity \$300 30 ? \$300 ? 8% ? 10 10% 2) Analyze the risk of a portfolio Use the data below and consider portfolio

### NPV , IRR

A company plans to acquire a piece corporate aircraft costing \$5,000,000. The aircraft is expected to save the company \$1,200,000 per year for each of its 5 year useful life. It will be depreciated straight line over 5 years. The firm's cost of capital is 12%. Its tax rate is 40%. It will replace another aircraft that was acquir

### Capital Structure Analysis: Pfizer Pharmaceutical Information

Using attached Pfizer Pharmaceutical information. Assume that the company will engage in a major capital acquisition program that is expected to improve EBIT by 10%. Do the following: 1) Calculate the EBIT/EPS for debt financing. Discuss the financial implications. Document the source of your information 2) Calculate the E

### Calculate and analyze the degree of operating leverage

A project has a fixed cost of \$1,000 per year, depreciation charges of \$500 a year, revenue of \$6,000 a year and variable costs equal to two-thirds of revenues. A. If sales increase by 5%, what will be the increase pretax profits B. What is the degree of operating leverage of this project C. Confirm that the percenta

### Calculate break-even points: Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for \$100. The materials cost for a standard diamond is \$30. The fixed costs incurred each year for factory upkeep and administrative expenses are \$200,000. The machinery costs \$1 million a year and is depreciated straight line over 10 years to a salvage value of zero. A. What is the accounting break-even level of sales in terms of number of diamonds sold? B. What is the NPV break-even sales assuming a tax rate of 35%, a 10-year project life and a discount rate of 12%

Dime a Dozen Diamonds makes synthetic diamonds by treating carbon. Each diamond can be sold for \$100. The materials cost for a standard diamond is \$30. The fixed costs incurred each year for factory upkeep and administrative expenses are \$200,000. The machinery costs \$1 million a year and is depreciated straight line over 10

### Calculate NPV and IRR

Growth Enterprise believes its latest project, which will cost \$80,000 to install, will generate a perpetual growing stream of cash flows. Cash flows at the end of this year will be \$5,000 and cash flows in future years are expected to grow indefinitely at an annual rate of 5%. A. If the discount rate for this project is 10

### Capital Budget Analysis

1. How would you define and quantify risk as used in capital budgeting analysis and what is the purpose of using sensitivity analysis?

### Cost of Capital

Calculate the cost of capital (show calculations) for Pfizer using the following: A) Weighted Average cost of capital B) Capital -asset pricing model (beta)

### Capital outlay

Large systems funding, generally associated with strategic information systems planning, usually requires funding with capital dollars. Who do you think should justify the capital outlay, the functional proponent(s) or the senior IT manager?

### Capital Budgeting- 30 questions on Capital Budgeting- Discounted Payback, NPV, Investment, IRR, modified , point of indifference, internal rate of return (MIRR), WACC, risk-adjusted discount rate

Please assist me with the following problems relating to discounted payback, NPV, investments and more. 1. Haig Aircraft is considering a project which has an up-front cost paid today at t = 0. The project will generate positive cash flows of \$60,000 a year at the end of each of the next five years. The project's NPV is

### Tax Losses and Gains in Capital Budgeting

Hercules Exercising Equipment Co. purchased a computerized measuring device two years ago for \$60,000. The equipment falls into the five-year category for MACRS depreciation and can currently be sold for \$23,800. A new piece of equipment will cost \$150,000. It also falls into the five-year category for MACRS depreciation. Ass

### DCF methods - good or bad

Explain if you think they're good or bad.

### 26 Practice Questions - Capital Structure

1. List and briefly describe the four components of working capital? 2. What is zero working capital and why would a company strive to achieve this? 3. Explain cash flow synchronization and at least 2 techniques that would be used to accomplish this. 4. Identify and briefly define the four variables of credit poli

### Concept of Risk in the Capital Budgeting Process

Question: Explain how the concept of risk can be incorporated into the capital budgeting process.

### 12-14 Pan American Bottling purchase of machine: NPV, IRR, accept the project?

12/14. The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is \$45,000. The annual cash flows have the following projections: Year Cash Flow 1 . . . . . . . . . . \$15,000 2 . . . . . . . . . . 20,000 3 . . . . . .

### Portfolio (market) risk in Capital Budgeting

Can you please explain Portfolio (market) risk in Capital Budgeting (at least 100 words)

### Stand alone risk in Capital Budgeting

Can you please explain Stand alone risk in Capital Budgeting (at least 100 words)

### Should the Pan American Bottling Company Purchase a New Machine?

The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is \$45,000. The annual cash flows have the attached projections. Year Cash Flow 1 \$15 000 2 20 000 3

### Risk and Decision Making

1. If corporate managers are risk-averse, does this mean they will not take risks? Explain. 2. Explain how the concept of risk can be incorporated into the capital budgeting process. 3. If risk is to be analyzed in a qualitative way, place the following investment decisions in order from the lowest risk to the highest ri

### Capital rationing and maximization of shareholder wealth

Does capital rationing impact maximization of shareholder wealth? Explain.

### Capital Budgeting Decisions: Example Problem

Why are capital budgeting decisions perhaps the most important financial decisions that a company can make?

### Accounting Rate of Return, Payback period, Internal Rate of Return

The directors of Makeit Ltd. Propose to buy a machine costing \$300,000. At the end of 5 years the machine will be sold for \$ 50,000. In each of the 5 years the machine will increase revenue by \$160,000. Increased annual expenditure of \$ 80,000 will be incurred. Makeit Ltd. will require an increase in working capital of \$40,000.

### Capital Budgeting Decisions - Chicago Valve Company

Although he was hired as a financial analyst after completing his MBA, Richard Houston's first assignment at Chicago Valve was with the firm's marketing department. Historically, the major focus of Chicago Valve's sales effort was on demonstrating the reliability and technological superiority of the firm's product line. Howeve

### Find the value (i.e., savings or loss) of purchasing and running the new boat for 15 years (instead of the Cynthia II).

Graham Dodd, the controller of the New Economy Transport Company was evaluating a replacement of the Cynthia II, one of the boats NETCO used to push barges up and down the Mississippi and Ohio Rivers. The Cynthia II was carried on their books at a net value of only \$30,000, but it could probably be sold 'as is' along with an ext

### Capital Budgeting (h)

"Capital Budgeting" Answer the following questions: 1)There is uncertainty in the market research forecasts from which you derive information to include in your own volume and price inputs for a financial proposal. How do you incorporate this uncertainty into your analysis? 2)If the land, which would be used for t

### Capital Budgeting - Your company is thinking about acquiring another corporation.

Your company is thinking about acquiring another corporation. You have two choices: the cost of each choice is \$250,000. You cannot spend more than that, so acquiring both corporations is not an options. The following are your critical data: a. Corporation A: 1) revenues = 100K in year one, increasing by 10% each year. 2)

### Finance Questions

Each answer should be between 200-300 words. 1. What is the concept of marginal cost of capital? 2. Would you expect the cost of capital to be different for an e-business versus a "brick and mortar" business? Why? 3. How would you modify your capital budgeting decision analysis to account for periods of inflation?

### Capital Budgeting-proposed acquisition of a new special- purpose truck: net investment in the truck, operating cash flow in Year 1, terminal year non-operating cash flows, NPV,

You have been asked by the President of your company to evaluate the proposed acquisition of a new special- purpose truck. The truck's basic price is \$50,000, and it will cost another \$10,000 to modify it for special use by your firm. The truck falls in the MACRS 3-year class, and it will be sold after three years for \$20,000. T