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Unformatted text preview: FIN 500 Assignment 4, due 02/28/11, 9:00 pm California time Total points 14 This assignment provides you an opportunity to practice estimating cash flow for capital budgeting projects (chapter 12), using the common approaches in capital budgeting (chapter 13) such as payback, internal rate of return and net present value in choosing project , using Excel functions such as irr() and npv() to calculate IRR and NPV. To complete this assignment, students need to get familiar with course content in chapter 12 and chapter 13. Problems in this assignment are chosen from Harvard Business School’s Case on Valuing Capital Project and are revised by the instructor. This assignment should be done as an individual work. Your completed Assignment 4 should be saved and submitted as an Excel workbook file, i.e., .xls file. The filename should begin assign4, then your last name and first letter of your first name. For example, if Allen Smith completes this assignment, he should name this assignment as assign4SmithA, save and submit it as an Excel workbook file (.xls file). 10% of this assignment points will be deducted if it’s not named or formatted as required. There are three problems in this assignment, each problem has several questions. Please provide detailed solutions and necessary explanations. Just providing a number as answer to a problem will not earn you any point. I need to see your solution process. 1. Growth Enterprise , Inc. (GEI) has $40 million that it can invest in any or all of the four B, C, D), which have cash flows as shown in the following table. Table 1. Comparison of Project Cash Flows ($ thousand dollars) Project Type of cash flow Year 0 Year 1 Year 2 Year 3 A. Investment -$10,000 0 0 0 Revenue 0 $21,000 0 0 Operating expense 0 $11,000 0 0 B. Investment -$10,000 0 0 0 Revenue 0 $15,000 $17,000 0 Operating expense 0 $5,833 $7,833 0 C. Investment -$10,000 0 0 0 Revenue 0 $10,000 $11,000 $30,000 Operating expense 0 $5,555 $4,889 $15,555 D. Investment -$10,000 0 0 0 Revenue 0 $30,000 $10,000 $5,000 Operating expense 0 $15,555 $5,555 $2,222 • All revenues and operating expenses can be considered cash items. Each of these projects is considered to be of equivalent risk. The investment will be depreciated for tax purpose. For simplicity, the depreciation per year for a project is equal to the projec by the life of the project. Project A has 1-year life, Project B has two-year life, and both Projec GEI’s marginal corporate tax rate on taxable income is 40%. None of the projects will have any their respective lives. 1-a) . Calculate Payback of each project and rank the four projects in order of preference based on payback approach ( 1 point )....
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- Spring '10
- Net Present Value