Capital Budgeting Solutions8

Capital Budgeting - YOU ARE GIVEN THE FOLLOWI NG INFORMATION FOR PROBLEMS 68 69 Year 0 1 2 3 4 68 Project A Present Value Terminal Value $6,000.00

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Old Exam Questions - Capital Budgeting - Solutions Page 71 of 96 Pages YOU ARE GIVEN THE FOLLOWING INFORMATION FOR PROBLEMS 68 - 69: Year Project A Present Value @ __% Terminal Value @ __% 0 - $6,000.00 1 $4,000.00 2 $5,000.00 3 $4,000.00 4 - $2,000.00 Total 68. Assuming that there is no capital rationing, and that the firm’s cost of capital and true reinvestment rate are both 12.0 percent, determine the modified internal rate of return (MIRR) for Project A. A. 21.50% B. 24.50% * C. 22.50% D. 25.50% E. 23.50% Year Project A Present Value @ 12% Terminal Value @ 12% 0 - $6,000.00 - $6,000.00 $0.00 1 $4,000.00 $0.00 $5,619.71 2 $5,000.00 $0.00 $6,272.00 3 $4,000.00 $0.00 $4,480.00 4 - $2,000.00 - $1,271.04 $0.00 Total - $7,271.04 $16,371.71 CFj = -$ 7,271.04 CFj = 0.00 CFj = 0.00 CFj = 0.00 CFj = $16,371.71 Solve for IRR = 22.50% 69. Now assume that there is capital rationing, and that although the firm’s cost of capital is 12.0 percent, its true reinvestment rate is 20.0 percent. Given this information, determine the modified net present value (MNPV) for Project A. A. $4,473.14
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Old Exam Questions - Capital Budgeting - Solutions Page 72 of 96 Pages B. $4,885.25 C. $4,610.51 D. $5,022.62 * E. $4,747.88 Year Project A Present Value @ 12% Terminal Value @ 20% 0 - $6,000.00 - $6,000.00 $0.00 1 $4,000.00 $0.00 $6,912.00 2 $5,000.00 $0.00 $7,200.00 3 $4,000.00 $0.00 $4,800.00 4 - $2,000.00 - $1,271.04 $0.00 Total - $7,271.04 $18,912.00 CFj = -$ 7,271.04 CFj = 0.00 CFj = 0.00 CFj = 0.00 CFj = $18,912.00 I/YR = 12% Solve for NPV = $4,747.88 70. Assume that your company is considering a 4-year project and that the proposed project has the following features: The project has an initial cost of $2,000,000 and will be depreciated using MACRS and a 3-year class life (therefore, it will be depreciated over 4 years). The company will need to increase its inventories by $120,000 at Year 0, and its accounts payable will also rise by $40,000 at Year 0. This net operating working capital will be recovered at the end of the project’s life, Year 4. If the project is undertaken, the company will realize incremental EBIT of $800,000 over each of the next four years (Years 1-4). The company’s incremental operating cost (not including depreciation) will equal $300,000 a year. The company’s tax rate is 40 percent. At Year 4, the project’s economic life is complete, but it is expected to l have a before-tax salvage value of $100,000. The project’s WACC = 10 percent.
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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 - YOU ARE GIVEN THE FOLLOWI NG INFORMATION FOR PROBLEMS 68 69 Year 0 1 2 3 4 68 Project A Present Value Terminal Value $6,000.00

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