Explore BrainMass

Variour problems dealing with NPV, IRR and WACC

(See attached file for full problem description)

Problem chapter 6-38
Problem chapter 7-21
Problem chapter 11-10
Problem chaper 11-15

(See attached file for full problem description)

Growth Enterprises believes its latest project, which will cost $80,000 to install, will generate a perpetual
growing stream of cash flows. Cash flow at the end of this year will be $5,000 and cash flows in future
years are expected to grow indefinitely at an annual rate of 5 percent.

a. If the discount rate for this project is 10 percent, what is the project NPV?

b. What is the project IRR?

Find the WACC of William Tell Computers. The total book value of the firm's equity is $10 million; book value
per share is $20. The stock sells for a price of $30 per share, and the cost of equity is 15 percent. The firm's
bonds have a par value of $5 million and sell at a price of 110 percent of par. The yield to maturity on the bonds
is 9 percent, and the firm's tax rate is 40 percent.

Examine the following book-value balance sheet for University Products, Inc. What is the capital structure of
the firm based on market value? The preferred stock currently sells for $15 per share and the common stock for
$20 per share. There are one million common shares outstanding.

(all values in millions)

Assets Liabilities and Net Worth
Cash and short-term securities $1 Bonds, coupon = 8% paid annually
maturity = 10 years, yield to maturity = 9% $10.0
Accounts receivable 3 Preferred stock (par value $20 per share) 2.0
Common stock (par value $.10) 0.1
Inventories 7 Additional paid in stockholders 9.9
Plants and equipment 21 Retained earnings 10.0
Total $32 $32.0

Revenues generated by a new fad product in each of the next 5 years are forecasted as follows:

Year Revenues
1 $40,000
2 30,000
3 20,000
4 10,000
Thereafter 0

Expenses are expected to be 40 percent of revenues, and working capital required in each year is expected
to be 20 percent of revenues in the following year. The product requires an immediate investment of
$50,000 in plant and equipment.

a. What is the initial investment in the product? Remember working capital.

b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line
depreciation, and the firm's tax rate is 40 percent, what are the project cash flows in each year?

c. If the opportunity cost of capital is 10 percent, what is the project NPV?

d. What is the project IRR?

© BrainMass Inc. brainmass.com July 16, 2018, 2:12 pm ad1c9bdddf


Solution Preview

The attached file have the answers.
6-38 - For a perpetuity, the prsent value is given by cash Flow/(discounting rate-growth rate). Here it is 5000/(0.1-0.05). The IRR formula in excel is for defined values and not for perpetuity. I have ...

Solution Summary

The solution has various problems dealing with calculation of NPV, IRR and WACC