Capital Budgeting Solutions9

Capital Budgeting Solutions9 - Old Exam Questions - Capital...

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Unformatted text preview: Old Exam Questions - Capital Budgeting - Solutions Page 81 of 96 Pages CFj = -$500 CFj = $400 CFj = $400 CFj = $400 Solve for IRR = 60.74% 78. Your company is thinking about taking on an investment project that will require an initial outlay of $10,000,000 at time period zero. You believe that this project will produce expected after-tax cash flows of $2,500,000 each year for 8 years (Years 1- 8). Given a cost of capital for this project of 10 percent, you can calculate that the expected NPV for this project is $3,337,315.49 and its IRR is 18.62 percent. Assume now that the firm has the option of delaying the start of this project for 2 years. If they delay the project its cost at Year 2 will increase to $12,500,000. The firm will also have better information about what the cash flows will actually be in Years 3-10 (still an 8-year project). Specifically, there is a 40 percent probability that the cash flow will be $250,000, and a 60 percent chance that the cash flow would be $4,000,000. Ignoring option pricing, determine the incremental NPV that will arise, as of time period zero, if the firm delays implementation of this project for 2 year. A. $1,099,358.68 B. $1,059,346.57 C. $1,086,021.31 * D. $1,046,009.20 E. $1,072,683.94 As of Time Period 2 : NPV CF Option 1 = -$12,500,000 + [$250,000][PVIFA 10%,8 ] = - $11,166,268.45 (will not take on project) NPV CF Option 2 = -$12,500,000 + [$4,000,000][PVIFA 10%,8 ] = $8,839,704.79 (will take on project) Expected NPV if Delayed = (.40)($0.00) + (.60)($8,839,704.79) = $5,303,822.87 As of Time Period 0 : Expected NPV if Delayed = ($5,303,822.87) / (1.10) 2 = $4,383,324.69 Incremental NPV = $4,383,324.69 - $3,337,315.49 = $1,046,009.20 79. You are given the following cash flow information for a project. Given this information, and assuming that the correct risk-adjusted discount rate (WACC) to use is 14 percent, determine the net present value of this project. (Hint: you may also wish to solve for IRR for use with the next problem). Year Cash Flow Present Value Old Exam Questions - Capital Budgeting - Solutions Page 82 of 96 Pages 0 -$10,000.00 1 $8,000.00 2 -$4,000.00 3 $9,000.00 4 $8,000.00 5 -$3,000.00 Total A. $2,643.93 B. $3,467.46 C. $2,918.44 D. $3,741.97 * E. $3,192.95 Year Cash Flow Present Value 0 -$10,000.00 -$10,000.00 1 $8,000.00 $7,017.54 2 -$4,000.00 -$3,077.87 3 $9,000.00 $6,074.74 4 $8,000.00 $4,736.64 5 -$3,000.00 -$1,558.11 Total $3,192.95 Alternatively, CFj = -$10,000.00 CFj = $ 8,000.00 CFj = -$ 4,000.00 CFj = $ 9,000.00 CFj = $ 8,000.00 CFj = -$ 3,000.00 I/YR = 14 Solve for NPV = $3,192.95 Solve for IRR = 29.2394% (not needed for this problem) 80. You are given the following cash flow information for a project. Given this information, and assuming that the correct risk-adjusted discount rate (WACC) to use is 14 percent, and that the firm’s true reinvestment rate is also 14 percent, determine the difference between the internal rate of return (IRR) and the modified internal rate of return (MIRR) for this project. for this project....
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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 Solutions9 - Old Exam Questions - Capital...

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