# Kartman Corporation and mutually exclusive project

I am posting some problems and need someone for help; I am using a financial book, from Jonathan Berk and Peter Demarzo (CORPORATE FINANCE). Those problems come from chapter 6 on that book. ISBN 0-201-74122-9 (alk.paper)

Please do problems #16; # 18 and # 19. (Mutually Exclusive Investment Opportunities For # 16 and # 18) (Project Selection with Resource Constraints For #19)

P.S: problem # 16 , just answer the part (b) as shown on the attachment please.

16 You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that.

b. Which investment has the higher NPV when the cost of capital is 7%?

18. You work for an outdoor play structure manufacturing company and are trying to decide between two projects:

Year-End Cash Flows ($ thousands)

Project 0 1 2 IRR

Playhouse -30 15 20 10.4%

Fort -80 39 52 8.6%

You can undertake only one project. If your cost of capital is 8%, use the incremental IRR rule to make correct decision.

19. Kartman Corporation is evaluating four real estate investments. Management plans to buy the properties today and sell them three years from today. The annual discount rate for these investments is 15%. The following table summarizes the initial cost and the sale price in three years for each property.

Cost Sale Price

Today in Year 3

Parkside Acres $500,000 $900,000

Real Property Estates 800,000 1,400,000

Lost Lake Properties 650,000 1,050,000

Overlook 150,000 350,000

Kartman has a total capital budget of $800,000 to invest in properties. Which properties should it choose?

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#### Solution Preview

For problem #16, I solve part (b) as written on the attachment.

16 You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that.

b. Which investment has the higher NPV when the cost of capital is 7%?

NPV is calculated by finding the present value of each cash flow, including both cash inflows and outflows, discounted at the project's cost of capital.

NPV = sum of CFt where CF is the cash flow

(1 + k)t k is the cost of capital

t is the period

Investment A

Find the present value of the cash flow.

Present value = Cash inflow per year/Cost of capital = $2 million/7% = 28,571,428.57

NPV = ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer which project should they choose.