Three Rivers Company runs clothing stores in the Pittsburg area. Three Rivers' management estimates that if it invests $250,000 in a new computer system, it can save $75,000 in annual cash operating costs. The system has an expected useful life of ten years and no terminal Disposal value. The required rate of return is 8%. Ignor
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Three Rivers Company runs clothing stores in the Pittsburg area. Three Rivers' management estimates that if it invests $250,000 in a new computer system, it can save $75,000 in annual cash operating costs. The system has an expected useful life of ten years and no terminal Disposal value. The required rate of return is 8%. Igno
What is the IRR (internal rate of return) of the after tax cash flows for each company? What does comparison of the IRR's suggest is the effective corporate tax rate?
A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,000 per year for 5 years. Company (A) has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. Company (B) pays corporate taxes at a rate of 35% and can depreciate the investment f
Purpose of the project: In this project, you are supposed to be a financial manager who determines the cost of debt, cost of preferred stock, cost of common equity, capital structure, and the weighted average cost of capital (WACC) for a Phizer (PFE). You will use the estimated WACC as the discount rate to conduct capital budge
1. Explain differences between incremental budgeting and Zero Based Budgeting. 2. Explain Activity Based Budgeting.
Study the information below and answer the following questions: 1.1.1 Calculate the payback period for project B (answers expressed in years, months and days). (3) 1.1.2 Calculate the accounting rate of return (on average investment) for each project. (4) 1.1.3 Calculate the net present value for each project. (6) 1.1.4 Ba
ALLIED FOOD PRODUCTS: Capital Budgeting and Cash Flow Estimation After seeing Snapple's success with non-cola 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 t
Budgets are plans of action based on forecasted transactions, activities, and events that are synonymous with managing an organization. They are essential to accomplishing the goals articulated in an organization's strategic plan and are used to communicate information, coordinate activities and resource usage, motivate employee
Look at the net present value (NPV) equation (11-1) in your text Fundamentals of Financial Management and the cash flow time line below the formula. In your own words, explain each term of the NPV equation. Explain how you would arrive at the discounted cash flows for each year represented within the time line. How does this cal
(1) What is the net present value of a project with the following cash flows if the required rate of return is 15 percent? Year Cash Flow 0 -$42,398 1 13,407 2 21,219 3 17,800 (2) A firm has a debt-to-equity ratio of 0.5. What is the firm's equity multiplier? (3) Microsoft's beta is 1. The risk free rate of return is 2%.
NPV or IRR investment decision process, why include manager intuition? $1 Million NPV project, what does this mean? For what kinds of investments would terminal value account for a substantial fraction of the total project NPV, and for what kinds of investments would terminal value be relatively unimportant? Suppose an
How is capital budgeting used in an organization? What are the considerations that need to be analyzed when setting up a proposed budget?
Please discuss the pros and cons of each financial tool - NPV, IRR, payback, profitability index.
Dash Shoes Inc. Prepare a monthly cash budget and supporting schedules for June, July, and August 2010.
The controller of Dash Shoes Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information: June July August Sales 120,000 150,000 200,000 Manufacturing costs 50,000
Provide a final full report of 4-6 pages to the CFO and CEO that encompasses the following: - Financial pros and cons and final recommendations for Superior going public and the new production plant - Discussion on what hurdle rates the production plant project would not pass - Debt versus no debt option (associated risk and
Calculate the net present value of each of the following potential investments using a discount rate of 12%. Assuming that this discount rate is the threshold rate for capital investment projects in your firm, determine which should or should not be considered for the upcoming capital budget and why they should or should not be
Stern Associates is considering a project that has the following cash flow data. What is the project's payback? Year 0 1 2 3 4 5 Cash flows -$1,100 $300 $310 $320 $330 $340 If you have a 3 year loan that requires $1,000 payments each year at 7%
Why is investing in foreign companies an effective way to diversity an individual's investment portfolio? A) Foreign economies are stronger than the U.S. economy. B) Foreign stocks are less risky than the stocks of U.S. corporations. C) Stock dividends received by foreign companies are not subject to US taxes for US citi
The projected cash flows for two mutually exclusive projects are as follows: Year Project A Project B 0 ($150,000) ($150,000) 1 0 50,000 2 0 50,000 3 0 50,000 4 0 50,000 5 250,000
Carmen Electronics bought a new machine for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. What is the payback period for this project? If their acceptance period is 5 years, will this project be accepted? a. 4.17 years; yes c. 3.83 years, yes b. 4.17 years; no
You are comparing two investment options. The cost to invest in either option is the same today. Both options provide you with $20,000 of income. Option A pays five annual payments of $4,000 each. Option B pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Which one
1. Your brother has asked you to help him with choosing an investment. He has $5,000 to invest today for a period of two years. You identify a bank CD that pays an interest rate of 4.25 percent with the interest being paid quarterly. What will be the value of the investment in two years? A) $5,434 B) $5,441 C) $5,107 D) $5,2
A1. (Calculating the WACC) The required return on debt is 8%, the required return on equity is 14%, and the marginal tax rate is 40%. If the firm is financed 70% equity and 30% debt, what is the weighted average cost of capital? A2. (NPV and PI) Vu Trading Company is evaluating a project that has the estimated cash flows gi
1.) You work for the Sing Oil Company, which is considering a new project whose data are shown below. What is the project's operating cash flow for Year 1? Sales revenues, each year $55,000 Depreciation $8,000 Other operating costs $25,000 Interest expense $8,000 Tax rate 35.0% 2) (Comp: 12.1-12.4) Salvage value calc
ABC company is evaluating its first year operating cash flows (at t=1). Here is some related information: Projected revenues = $1 million Operating costs (excluding depreciation)=$0.7 million Interest expense = $0.2 million Depreciation expense=$0.2 million Tax rate=40% What is the company's operating cash flow for
Since capital budgeting decisions involve the estimation of a project's future cash flows and the rate at which they should be discounted is still a relatively subjective process, the behavioral traits of managers still affect this process. How can managers better improve their ability to eliminate biases in their forecasting.
Problem 1 - Flexible budget planning Luke Chou, the president of Digitech Computer Services, needs your help. He wonders about the potential effects of the firm's net income if he changes the service rate that the firm charges its customers. The following basic data pertain to fiscal year 2012. Standard rate and variable cost
Net Present Value, Mergers, and Acquisitions Module 5 Case has two parts. Part I of this case assignment is related to capital budgeting decision and Part II is about mergers and acquisitions. Please read both parts carefully before you start answering the questions. Part 1: Net Present Value (NPV) method is one of the
Capital budgeting and investment planning are some key financial management decisions that firms routinely have to make, especially in a low interest rate climate such as the one we are currently in. Why do you think interest rates matter? What's the real reason, besides money being cheaper when rates are lower?
If the weighted average cost of capital for the firm is 4% and the projects are mutually exclusive, which project would you choose based upon the NPV rule?
For questions 26 through 34 use the following cash flows (if otherwise unspecified use a WACC of 6%): Cash Flows Years Project A Project B 0 $ (500,000.00) $ (500,000.00) 1 $ 80,000.00 $ 280,000.00 2 $ 130,000.00 $ 230,000.00 3 $ 180,000.00 $ 180,000.00 4 $ 270,000.00 $ 130,000.00 5