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Finance: Capital budgeting.

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1)Your company, RMU Inc., is considering a new project whose data are shown below. What is the project's Year 1 cash flow?
Sales revenues $22,250
Depreciation $ 8,000
Other operating costs $12,000
Tax rate 35.0%

a. $10,039

b. $9,463

c. $9,179

d. $9,746

e. $8,903

2)TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 13.)
WACC 10.0%
Pre-tax cash flow reduction for other products (cannibalization) $ 5,000
Investment cost (depreciable basis) $80,000
Straight-line deprec. rate 33.333%
Sales revenues, each year for 3 years $67,500
Annual operating costs (excl. deprec.) $25,000
Tax rate 35.0%

a. $3,828

b. $4,019

c. $4,220

d. $3,636

e. $4,431

3)Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?
Risk-adjusted WACC 10.0%
Net investment cost (depreciable basis) $65,000
Straight-line deprec. rate 33.3333%
Sales revenues, each year $65,500
Operating costs (excl. deprec.), each year $25,000
Tax rate 35.0%

a. $16,569

b. $19,325

c. $15,740

d. $17,441

e. $18,359

4)Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?
Equipment cost (depreciable basis) $65,000
Straight-line depreciation rate 33.333%
Sales revenues, each year $60,000
Operating costs (excl. deprec.) $25,000
Tax rate 35.0%

a. $28,836

b. $31,092

c. $28,115

d. $30,333

e. $29,575

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Solution Summary

The problem set are multiple choice questions that include topics in capital budgeting.

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See Also This Related BrainMass Solution

Finance: Capital Budget Process

Need to see step by step equation solutions.

Data:

rd= 10%
T= 40%
FX1= 96.57 ¥
FX0= 95.72 ¥
Dps= 139.19 ¥ per share, selling at 1,000 ¥ per share; the underwriting cost is 7%, or 70 ¥
Pn= 930 ¥
Original Bond Yield: 12%
Risk Premium: 1.5%
rRF= 5%
RPM= 6.5%
bi= 1.75
RPW= 3.83%
biW= 1.44
n = 3 years
CF1= -300,425 ¥
CF2= -60,190 ¥
CF3= 210,515 ¥
Inventory Increases = 455,000 ¥
A/R Increases = 890,000 ¥
A/P & Current Liabilities Increases = 1,375,000 ¥
Net Operating Profits = 12,565,235 ¥
Net Fixed Assets = 11,730, 275 ¥
NOCF3= 70,165 ¥
g = 185%
S3= 90,175 ¥
Fixed Costs = 845,000 ¥
Variable Costs per Unit = 55 ¥
P = 110 ¥
BE = 10425 Units
Payback Period = 2.35 Years

Questions:
1.Calculate the After Tax Cost of Debt for a domestic-only company

2.Calculate the After Tax Cost of Debt for an internationally-based company with debt denominated in a foreign currency

3.Compare & Contrast the Cost of debt for a domestic-based with an international-based company. What do the numbers tell you about doing business internationally as opposed to domestically?

4.Calculate the Cost of Preferred Stock

5.Calculate the Cost of Equity using the Company Bond Yield, Risk Premium Approach, then calculate the Cost of Equity using the [domestic-only] CAPM, and then calculate the Cost of Equity using the Global CAPM

6.Contrasting & comparing the three values for the cost of equity should provide insight into the accuracy of forecasting & valuating the companyâ??s equity. What are those insights?

7.Calculate the Weighted Average Cost of Capital using both the domestic-only and then the international-based CAPM. (Use the little chart I made for you in the Capital Budget Process document. Itâ??s easier to organize the work this way.)

8.Calculate the NPV and IRR for this project.

9.Calculate the Net Operating Working Capital, Free Cash Flow, and salvage value for the project.

10.Calculate the break-even point for this project. Then, if the company were to set the break-even point, and wanted to know at what price they should set the commodity to achieve that break-even point, calculate the price at the company-set break-even point. If the industry average units per year manufactured is 5,000 units annually, is this an efficient operation? Why or why not?

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