Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $17,100 and that for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows, including depreciation, are as follows:
Year Truck Pulley
1 5,100 7,500
2 5,100 7,500
3 5,100 7,500
4 5,100 7,500
5 5,100 7,500
Using Excel functions (not formulas), the solution illustrates how to compute a project's net present value, internal rate of return, and modified internal rate of return. It also discusses how to pick among mutually exclusive projects.
Managerial balance sheet conversation
1) Define and discuss the following:
a) Required Investments
b) Replacement Investments
c) Expansion Investments
d) Diversification Investments
e) How do these differences impact the allocation of capital funds?
2) When applying the NPV rule, how would increased risk be reflected in the computations?
3) Two projects have the expected cash flows shown below. The projects have similar risk characteristics and their cost of capital is 15 percent.
End of Year Project A Project B
Now (11,000,000) (7,000,000)
1 7,000,000 3,000,000
2 3,000,000 1,500,000
3 3,500,000 1,500,000
4 3,000,000 500,000
a) Calculate the NPV for each project. Which project should be accepted if they are independent? If they are mutually exclusive?
4) Discuss how management determines which projects to fund when there is a limit on the total capital available for investment..
5) How do managers make a choice between investments with unequal life spans?
Please convert the attached from one form to a managerial balance sheet form.View Full Posting Details