Capital budgeting: Pro forma income with 10% inflation, expected NPV of project
Not what you're looking for?
(See attached file for full problem description)
1. Pittsburg Corporation has sales of $100,000 a year and the sale price will increase with inflation. Inventory valuation is such that the effective cost of goods sold is the purchase price three months prior to sale. Depreciation is fixed, and other operating costs increase proportionately with inflation. The company sells on terms of net 30 and buys inventory on terms of net 60. All other purchases are for cash. Shown below is a financial statement for the first year of operation, with no inflation. Show the income for the following year with a 10% inflation rate.
Sales $100,000
Cost of goods sold 80
Depreciation 5,000
Other operating expenses 10,000
Earnings before tax 5,000
Tax 1,700
Net income $3,300
2. An investment costs $5,000, after tax considerations, and will generate cash flows of $1,000 a year over its life. The capital investment will last for 8, 9, or 10 years, with probabilities of 0.4, 0.4, and 0.2 respectively. At a 10% required return, compute the expected net present value and standard deviation of net present value.
3. Your firm and a possible project have the following cash flows:
Company Project
Economy good bad good bad
Year 0 -200 -200 -50 -50
Year 1 100 50 20 60
Year 2 120 60 30 50
Year 3 110 55 40 90
Year 4 90 45 35 70
Given 8% discount rate, a 60% chance of a good economy over the next 4 years, and a 40% chance of bad economy, what are the expected net present value and standard deviation of net present value for the company, for the project, for the combination of the company and the project?
Purchase this Solution
Solution Summary
In Excel, the solution shows all the formulas and calculations together with good explanations for the problems.
Purchase this Solution
Free BrainMass Quizzes
Managing the Older Worker
This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.