Capital Budgeting Solutions2

Capital Budgeting Solutions2 - * E. 11.44% TV =...

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Old Exam Questions - Capital Budgeting - Solutions Page 11 of 96 Pages * E. 11.44% TV = ($180)(1.10) 3 + ($170)(1.10) 2 + ($160)(1.10) 1 + ($150)(1.10) 0 = $771.28 CF 0 = -$500.00 CF 1 = $ 0.00 CF 2 = $ 0.00 CF 3 = $ 0.00 CF 4 = $771.28 Solve for MIRR = 11.44% Alternatively, N = 4 PV = -$500.00 PMT = $0.00 FV = $771.28 Solve for I/YR = 11.44% 6. What is the net present value of Project A if you assume infinite replication and use the Equivalent Annual Annuity approach to determine NPV? A. $87.25 B. $80.12 * C. $84.51 D. $76.94 E. $91.86 CF 0 = -$500.00 CF 1 = $180.00 CF 2 = $170.00 CF 3 = $160.00 CF 4 = $150.00 I/YR = 10% NPV = $ 26.79 Solve for EAA: N = 4 I/YR = 10% PV = $26.79 FV = $0.00 Solve for PMT = $8.451 = EAA NPV A Under Infinite Replication = $8.451 / .10 = $84.51
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Old Exam Questions - Capital Budgeting - Solutions Page 12 of 96 Pages 7. Your company is thinking about taking on an investment project that will require an initial outlay of $2,000,000 at time period zero. You believe that this project will produce expected after-tax cash flows of $480,000 each year for 6 years (Years 1-6). Given a cost of capital for this project of 8 percent, you can calculate that the expected NPV for this project is $218,982.24 and its IRR is 11.53 percent. Assume now that the firm has the option of delaying the start of this project for 1 year. If they delay the project its cost at Year 1 will increase to $2,250,000. The firm will also have better information about what the cash flows will actually be in Years 2-7 (still a 6-year project). Specifically, there is a 50 percent probability that the cash flow will be $280,000, and a 50 percent chance that the cash flow would be $680,000. Ignoring option pricing, what is the incremental NPV that will arise, as of time period zero, if the firm delays implementation of this project for 1 year? * A. $194,702.10 B. $201.343.45 C. $187,294.38 D. $218,327.71 E. $209,845.27 As of Time Period 1 : NPV CF Option 1 = -$2,250,000 + [$280,000][PVIFA 8%,6 ] = - $955,593.69 (will not take on project) NPV CF Option 2 = -$2,250,000 + [$680,000][PVIFA 8%,6 ] = $893,558.17 (will take on project) Expected NPV if Delayed = (.50)($0.00) + (.50)($893,558.17) = $446,779.09 As of Time Period 0 : Expected NPV if Delayed = ($446,779.09) / (1.08) = $413,684.34 Incremental NPV = $413,684.34 - $218,982.24 = $194,702.10 8. The cash flows associated with a project can be represented by the following decision tree (conditional probabilities are in parentheses): Year 0 Year 1 Year 2 Year 3 $ 0 (.5) $100 (.5) $200 (.5) $200 (.5) $200 (.5) $300 (.5) $400 (.5) -$400
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Old Exam Questions - Capital Budgeting - Solutions Page 13 of 96 Pages $400 (.5) $500 (.5) $600 (.5) $600 (.5) $600 (.5) $700 (.5) $800 (.5) What is the expected NPV for this project if the appropriate cost of capital is 10 percent? A. $542.48 B. $576.93 * C. $594.74 D. $486.82 E. $510.77 After calculating expected cash flows for each year, NPV will be equal to: -$400 + $400 / (1.10) 1 + $400 / (1.10) 2 + $400 / (1.10) 3 = $594.74 Alternatively, CF 0 = -$400.00 CF 1 = $400.00 CF 2 = $400.00 CF 3 = $400.00 I/YR = 10% Solve for NPV = $594.74 Alternatively, N = 3 I/YR = 10 PMT = $400.00 FV = $0.00 Solve for PV = $994.74 Solve for NPV = $994.74 - $400.00 = $594.74 9. Your company is considering the installation of a new production system that will cost $150,000. It is estimated that the system will increase revenues by $65,000 annually
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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Capital Budgeting Solutions2 - * E. 11.44% TV =...

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