# Finance: Capital budgeting.

calculations must be shown in excel

1) Continuous Compounding: Compute the future value of $1,900 continuously compounded for:

a: 5 years at a stated annual interest rate of 12 percent.

b. 3 years at a stated annual interest rate of 10 percent.

c. 10 years at a stated annual interest rate of 5 percent.

d. 8 years at a stated annual interest rate of 7 percent.

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2) NPV versus IRR: Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent.

Year Deepwater Fishing New Submarine Ride

0 -$750,000.00 -$2,100,000.00

1 310.00 1,2000,000.00

2 430,000.00 760,000.00

3 330,000.00 850,000.00

As a financial analyst for BRC, you are asked the following questions:

a. If your decision rule is to accept the project with the greater IRR, which project should you choose?

b. Because you are fully aware of the IRR rule's scale problem, you calculate the incremental IRR for the cash flows. Based on your computation, which project should you choose?

c. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?

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3) Calculating Project NPV: The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.

Year 0 Year 1 Year 2 Year 3 Year 4

Investment $16,000.00

Sales revenue $8,500.00 $9,000.00 $9,500.00 $7,000.00

Operating costs 1,900.00 2,000.00 2,200.00 1,700.00

Depreciation 4,000.00 4,000.00 4,000.00 4,000.00

Net working capital

spending 200.00 250.00 300.00 200.00 ?

a. Compute the incremental net income of the investment for each year.

b. Compute the incremental cash flows of the investment for each year.

c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?

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4) Bond Yields: Pembroke Co. wants to issue new 20-year bonds for some much needed expansion projects. The company currently has 10 percent coupon bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. what coupon rate should the company set on its new bonds if it wants them to sell at par?

5) Accrued Interest: You purchase a bond with an invoice price of $1,090.00. The bond has a coupon rate of 8.4 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?

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#### Solution Summary

The problem set deals with topics under capital budgeting and bond pricing.

Finance: Capital Budget Process

Need to see step by step equation solutions.

Data:

rd= 10%

T= 40%

FX1= 96.57 ¥

FX0= 95.72 ¥

Dps= 139.19 ¥ per share, selling at 1,000 ¥ per share; the underwriting cost is 7%, or 70 ¥

Pn= 930 ¥

Original Bond Yield: 12%

Risk Premium: 1.5%

rRF= 5%

RPM= 6.5%

bi= 1.75

RPW= 3.83%

biW= 1.44

n = 3 years

CF1= -300,425 ¥

CF2= -60,190 ¥

CF3= 210,515 ¥

Inventory Increases = 455,000 ¥

A/R Increases = 890,000 ¥

A/P & Current Liabilities Increases = 1,375,000 ¥

Net Operating Profits = 12,565,235 ¥

Net Fixed Assets = 11,730, 275 ¥

NOCF3= 70,165 ¥

g = 185%

S3= 90,175 ¥

Fixed Costs = 845,000 ¥

Variable Costs per Unit = 55 ¥

P = 110 ¥

BE = 10425 Units

Payback Period = 2.35 Years

Questions:

1.Calculate the After Tax Cost of Debt for a domestic-only company

2.Calculate the After Tax Cost of Debt for an internationally-based company with debt denominated in a foreign currency

3.Compare & Contrast the Cost of debt for a domestic-based with an international-based company. What do the numbers tell you about doing business internationally as opposed to domestically?

4.Calculate the Cost of Preferred Stock

5.Calculate the Cost of Equity using the Company Bond Yield, Risk Premium Approach, then calculate the Cost of Equity using the [domestic-only] CAPM, and then calculate the Cost of Equity using the Global CAPM

6.Contrasting & comparing the three values for the cost of equity should provide insight into the accuracy of forecasting & valuating the companyâ??s equity. What are those insights?

7.Calculate the Weighted Average Cost of Capital using both the domestic-only and then the international-based CAPM. (Use the little chart I made for you in the Capital Budget Process document. Itâ??s easier to organize the work this way.)

8.Calculate the NPV and IRR for this project.

9.Calculate the Net Operating Working Capital, Free Cash Flow, and salvage value for the project.

10.Calculate the break-even point for this project. Then, if the company were to set the break-even point, and wanted to know at what price they should set the commodity to achieve that break-even point, calculate the price at the company-set break-even point. If the industry average units per year manufactured is 5,000 units annually, is this an efficient operation? Why or why not?

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