# fm topic 5 - BWFF 2043(Group M Topic Five Capital Budgeting...

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BWFF 2043 (Group M) Topic Five Capital Budgeting Exercise Group 6 Name Matric No Muhammad Ikhwan Firdaus bin Ahmad Zamri 233805 Nurizzah Ashikin binti Pauzi 234008 Siti Noratikah binti Che Daud 238483 Norainaa Farahin binti Mohamad Khodori 238443 Low Yi Ling 239618 Question 3

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Buy Coastal, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Year Cash flow ( A ) Cash flow ( B ) 0 - \$ 40000 - \$60000 1 19000 14000 2 25000 17000 3 18000 24000 4 6000 270000 Project A total cash flows = \$44000 after Year 2 the cash flows are short by \$4000 of recapturing the initial investment Payback = 2 + (\$4000 / \$18000) = 2.22 years Project B Cash flows = \$14000 + 17000 + 240000 = \$55000 during the first three years. The cash flows are still short by \$5000 of recapturing the initial investment Payback = 3 + (\$5000 / \$270000) = 3.02 years Using the payback criterion and a cutoff of three years, accept project A and reject project B Question 4
An investment project has annual cash inflows of \$4,200, \$5,300, \$6,100, and \$7,400 for the next four years, respectively, and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial cost is \$6,500? What if the initial cost is \$9,600? What if the initial cost is \$11,800? initial cost is \$6,500 Present value for each cash flow: Y 1 = \$4200/ (1.14) = \$ 3684.21 Y 2 = \$5300/ (1.14) 2 = \$ 4078.18 Y 3 = \$6100/ (1.14) 3 = \$ 4117.33 Y 4 = \$7400/ (1.14) 4 = \$ 4381.39 The discounted first year cash flow is \$ 2815.79 Discounted payback = 1 + [(\$6500 – 2815.79) / \$4078.18] = 1.90 years initial cost is \$9,600 The discounted second year cash flow is \$ 1837.61 Discounted payback = 2 + [(\$9600 – 1837.61) / \$4117.33] = 3.89 years initial cost is \$11,800 The discounted second year cash flow is \$ 4037.61 Discounted payback = 2 + [(\$11800 – 4037.61) / \$4381.39] = 3.77 years Question 5

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An investment project costs \$14,000 and has annual cash flows of \$3,700 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5 percent? If it is 19 percent? R = 0%: Present value for each cash flow: Y 1 = 14000 – 3700 = \$ 10300 Y 2 = 10300-3700 = \$ 6600 Y 3 = 6600-3700 = \$ 2900 Y 4 = 2900-3700 = - \$ 800 Discounted payback period = 3+ (2900/3700)= 3.78 years R = 5%: Y 1 = 14000- [\$3700/ (1.05)] = \$ 10476.19 Y 2 = 10476.19 – [\$3700/ (1.05) 2 ]= \$ 7120.18 Y 3 = 7120.18 – [\$3700/ (1.05) 3] = \$ 3923.98 Y 4 = 3923.98- [\$3700/ (1.05) 4 ]= \$ 879.98 Y 5 = 879.98 – [ \$3700 / (1.05) 5 ] = -\$2019.07 Discounted payback period = 4+ (879.98/2899.05)= 4.30 years R = 15%: Y 1 = 14000- [\$3700/ (1.15)] = \$ 10782.61 Y 2 = 10782.61 – [\$3700/ (1.15) 2 ]= \$ 7984.88 Y 3 = 7984.88 – [\$3700/ (1.15) 3] = \$ 5552.07 Y 4 = 5552.07- [\$3700/ (1.15) 4 ]= \$ 3436.58 Y 5 = 3436.58 – [ \$3700 / (1.15) 5 ] = \$ 1597.03
Y 6 = 1597.03 – [ \$3700/ (1.15) 6 ] = -\$2.58 Discounted payback period = 5+ (1597.03/1599.61)= 6 years Question 6 You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of \$15 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of \$1,938,200, \$2,201,600, \$1,876,000, and \$1,329,500 over these four years, what is the project’s average accounting return (AAR)? Average net income = (projected net income 1 +Projected net income 2 +Projectednet income 3 +projected net income 4 / Life of the project) =(\$1938200+2201600+1876000+1329500) / 4 = \$1836325 Average book value = Beginning book value + Closing book value/2 =(\$15000000 + 0) / 2 = \$7,500,000 So, the AAR for this project is: AAR = Average net income / Average book value = \$1836325 / \$7500000 =0.2448 or 24.48 % Question 7

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A firm evaluates all of its projects by applying the IRR rule. If the required return is 14 percent, should the firm accept the following project?
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