{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Capital Budgeting Solutions9

Capital Budgeting Solutions9 - CFj =-$500 CFj = $400 CFj =...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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 * 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)
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern