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# Net Present Value (NPV)

### IRR, NPV, Payback Calculations

In 2000, the company bid on a U.S. Navy contract to supply 100,000 canvas "sea bags" a year for five years. MMS bid \$25 per bag, fixed for five years. The plant was fully depreciated on MMS' books, except for the \$10,000 cost of the land (bought in 1947). The company had turned down \$900,000 for the land in 1995 from a real

### NPV of Torrence Hardware investment; entry for job completion

1. Six years ago, Torrence Hardware paid a contractor \$45,000 to expand the store. At that time, the company calculated a net present value of about \$6,000 for the expansion. Now, the company believes that the investment increased annual cash inflows by \$8,000 per year for each of the six years. Torrence has a desired rate of

### Financial Target Capital Structures

1) Jackson Company has a target capital structure of 40% debt and 60% common equity. The company's before-tax cost of debt is 12% and its marginal tax rate is 40%. The current stock price is \$22.50; the last dividend was \$2.00 and the dividend is expected to grow at 7%. What will be the firm's cost of common equity and WACC?

### Net Present Value Method

The management of Opry Company, a wholesale distributor of suntan products, is considering the purchase of a \$25,000 machine that would reduce operating costs in its warehouse by \$4,000 per year. At the end of the machine's 10-year useful life, it will have no scrap value. The company's required rate of return is 12% REQUIRED

### Metropolitan Transit Authority/Auto-Vend - Replacement Decision

The Metropolitan Transit Authority (MTA) has included a cafeteria car on the passenger train it operates. Yearly operations of the cafeteria car has shown a consistent loss, which is expected to persist, as follows: Revenues (in cash) \$200,000 Expe

### Net Present Value of project to open a car dealership

You are thinking about opening a car dealership. You bought some real estate last year for \$700,000 which you will use for the dealership. The market value of this real estate today is \$1,200,000. To build the necessary showroom and shop it will cost you \$600,000, a cost which you will depreciate over 3 years. You estimate an in

### Lett Corporation: Salvage Value of an Aircraft

(Ignore income taxes in this problem) Lett Corporation is investigating buying a small used aircraft for the use of its executives. The aircraft would have a useful life of 7 years. The company uses a discount rate of 15% in its capital budgeting. The net present value of the investment, excluding the salvage value of the aircra

### Financial Management

Imagine that you are a senior manager of a company operating in Hong Kong in a highly innovative and competitive market with an annual turnover of US\$500,000,000 and that you have a first draft of what can be a good business opportunity with an estimated investment (sunk) cost of US\$50,000,000. Your intuition is that it might

### Sunk Cost and Net Present Value

A sunk cost is: the value of an asset currently owned by a firm. a cost for which there is no alternative option. another name for a fixed cost. a cost that has already been incurred and cannot be recouped. a form of erosion. Fun Land is considering adding a miniature golf course to its facility. The course w

### Capital Budgeting

a. You are offered an investment with returns of \$2,237 in year 1, \$3,748 in year 2, and \$3,493 in year 3. The investment will cost you \$8,746 today. If the appropriate Cost of Capital (quoted interest rate) is 9.8%, what is the Profitability Index of the investment? b. You are offered an investment with returns of \$1,595 i

### Capital Budgeting Analysis: Expected NPV, Value of Debt & Equity

See attached file for template. Capital budgeting assignment: Calculate the expected value of the company's debt in one year with and without the expansion based on values in Excel spreadsheet. The answers are to go in the gray cells along with the formulas showing how the answer was derived. Probability "Without ex

### International Capital Budgeting: Imperial Power- Spain

Please see attached for the case. Here are the requirements: 1. Forecast revenues both in the local and export markets (forecasting revenues in the export market is complicated by fluctuations in the exchange rates involved and the price elasticity factor). 2. The cost structure should be differentiated in terms of the loc

### Calculating Net Present Value in Excel

You purchased land 3 years ago for \$84000 and believe its market value is now \$93000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you \$128000, an expense that you plan to depreciate straight line over the next three years. Wells Fargo offered you a loan for

### A firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Briefly explain why such a firm would tend to become riskier over time.

A firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Briefly explain why such a firm would tend to become riskier over time.

### Time Value of money, cost of capital, NPV

1. Discuss how the concept of "the time value of money" is critical when making capital investment decisions. 2. Discuss "cost of capital" and its relevance when making capital investment decisions. 3. Suppose that a firm must choose between two mutually exclusive projects, both of which have negative NPV. Explain how a firm

### Evaluating a proposed acquisition

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 into the MACRS five-year class {MACRS rates as percentages: 20, 32, 1

### Capital Budgeting and Long-Term Financing Decisions

See the attached file. Capital Budgeting and Long-Term Financing Decisions 1. We will open a business that requires the following three steps; we will need to find a viable location, market the product, and borrow money from the local bank. All three steps must be successful and the probability of success for the location is

### The Philadelphia Clinic Case Study: Computing After-Tax NPV

The Philadelphia Clinic, a for-profit medical facility is planning to spend \$45,000 for modernized X-ray equipment. It will replace equipment that has zero book value and no salvage value, although the old equipment would have lasted another 7 years. The new equipment will save \$16,000 in cash operating costs for each of t

### International Finance: What are some specific examples of projects or decisions, which could be made, using, and discounted cash flows analysis within your company or business experience?

1. What are some specific examples of projects or decisions, which could be made, using, and discounted cash flows analysis within your company or business experience? 2. Why is inflation not a consideration when the basic concept that money has time value is discussed? Inflation does play a role, when determining the spec

### Short Term vs Long Term Project Benefits for Capital and NPV

Scenario: Two mutually exclusive projects are being considered. First, a short-term project (a project which most of its cash inflows come in relatively soon) may have a higher ranking under NPV if the cost of capital is high (NPV Decision rules mutually exclusive projects: Accept the project with the highest positive NPV). Howe

### Fundamentals of Financial Management

Can you help me with this assignment? Fundamentals of Financial Management 12-2: PROJECT CASH FLOW Eisenhower Communications is trying to estimate the first-year net cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project: Sales revenues \$10 million O

### Preferred method of ranking capital projects; working capital

#1. What is the preferred method of ranking different capital projects? Why is it preferred? #2. What are the elements of working Capital management? What might you do as a manager to control each element? #3. Why would firms wish to hold cash and/or marketable securities?

### Analysis of Problem

Problem 16 A company is considering two alternative methods of producing a new product. The relevant data concerning the alternatives are presented below: Alternative Alternative I II Initial investment \$64,000 \$120,000 Annual receipts \$50,000 \$60

### Capital structure mix, NPV of project, value of bonds

1. MSM company is considering an investment in and the introduction of a new product line. The financial performance of the line will depend upon the state of the economy. The following forecasts have been made for this project. If the economy is strong (20% probiblity) the return is expected to be 20% If the economy is modera

### Apply Financial Analysis Concepts and Techniques

See attached file "After-Tax Cost of Debt" L.L. Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8%. L.L. belives it could issue new bonds at par that would provide a similair yield to maturity. If its marginal tax rate is 35%, what is L.L.'s after tax cost of debt?

### Net Present Value

"Smart analysts can massage the numbers in NPV analysis to make any project's NPV look positive. It is better to use a simpler approach, such as payback, that gives analysts fewer degrees of freedom to manipulate the numbers." Respond to this comment.

### Evaluate alternative investments for a company

A company is considering the following investment opportunities (ABC) Investment Initial cost NPV@15% Expected life IRR A. \$5,500,000 340,000 10 years 20% B. \$3,000,000 300,000 10 years 30% C. \$2,0

### Importance of financial managers

1. Identify one of the principal responsibilities of each of the following financial managers: (a) Chief Financial Officer (CF0), (b) Treasurer, and (c) Controller. How important is that these financial managers are: (d) ethical; (e) efficient? Explain. 2. (a) Identify three market variables whose value affects the financia

### EVALUATING PROJECT USING NET PRESENT VALUE METHOD

You are to evaluate a (hypothetical) proposed new project for O'Reilly Automotive that involves getting into the automotive care products business, such as cleaners, waxes and conditioners in a major way, by manufacturing your own private brand of these products and distributing them through your stores. The following are the k

### Effect Of Cash Flow On Net Positive Value's Discount Rate

Assuming that their NPVs based on the firm's cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in it's life True or false