Capital Budgeting Solutions5

# Capital Budgeting Solutions5 - CFj = CFj = CFj = CFj = I/YR...

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Old Exam Questions - Capital Budgeting - Solutions Page 41 of 96 Pages CFj = 10,000 CFj = 15,000 CFj = 25,000 CFj = 20,000 I/YR = 10% Solve for NPV = \$23,930.74 Solve for IRR = 38.28% 37. Assume that your company is considering an investment project which has the following cash flows: Year Cash Flow 0 -\$1,000 1 \$400 2 \$350 3 \$500 4 \$400 Given a weighted average cost of capital of 10 percent, determine the internal rate of return (IRR) for this project. A. 19.0% B. 22.0% C. 21.0% D. 20.0% * E. 23.0% The WACC is irrelevant to the value of IRR. CFj = -1,000 CFj = 400 CFj = 350 CFj = 500 CFj = 400 Solve for IRR = 23.0% 38. Assume that your company is considering a project with the following cash flows (note that the cash flow in Year 3 is a negative cash flow).

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Old Exam Questions - Capital Budgeting - Solutions Page 42 of 96 Pages Year Cash Flow 0 -\$200,000 1 \$125,000 2 \$150,000 3 -\$50,000 4 \$125,000 Also assume that the weighted average cost of capital is 12 percent. Determine the modified internal rate of return (MIRR) for this project. A. 19.0% B. 22.0% C. 21.0% * D. 20.0% E. 23.0% First, find the present value (at Year 0) of the cash outflows: PV = [-\$200,000 / (1.12) 0 ] + [-\$50,000 / (1.12) 3 ] = -\$235,589.01 Second, find the terminal value (at Year 4) of the cash inflows: TV = (125,000)(1.12) 3 + (\$150,000)(1.12) 2 + (\$125,000)(1.12) 0 TV = \$175,616.00 + \$188,160.00 + \$125,000 = \$488,776.00 Third, find the interest rate which equates the two: N = 4; PV = -235,589.01; FV = 488,776.00; Solve for I/YR = 20.0% = MIRR Alternatively, CFj = -235,589.01 CFj = 0 CFj = 0 CFj = 0 CFj = 488,776.00 Solve for IRR = 20.0% 39. Assume that your company is looking at a potential investment project and that the following information is associated with the project: Allowable Depreciation Year Net Income* for 3-Year MACRS Class 1 \$50,000 0.33 2 \$60,000 0.45
Old Exam Questions - Capital Budgeting - Solutions Page 43 of 96 Pages 3 \$70,000 0.15 4 \$50,000 0.07 *Assume no interest expenses and a zero tax rate. Now assume that the project involves an initial investment of \$100,000 in equipment that falls in the 3-year MACRS class and has an estimated salvage value of \$15,000. In addition, the company expects an initial increase in net operating working capital of \$5,000 which will be recovered in year 4. The cost of capital for the project is 12 percent. Given this information, determine the net present value for this project. (You may wish to use the table below to help organize the data.) Year Investment NWC Net Income Depreciation FCF 0 -\$100,000 1 \$33,000 2 \$45,000 3 \$15,000 4 \$15,000 \$7,000 * A. \$162,248.71 B. \$168,894.36 C. \$165,374.49 D. \$174,738.28

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Capital Budgeting Solutions5 - CFj = CFj = CFj = CFj = I/YR...

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