Question 3 bh 537 a firm has 100 million available

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QUESTION 3 (BH-537) A firm has $100 million available for capital expenditures. It is considering investing in one of two projects; each has a cost of $100 million. Project A has an IRR of 20 percent and an NPV of $9 million. It will be terminated at the end of 1 year at a profit of $20 million, resulting in an immediate increase in earnings per share (EPS). Project B, which cannot be postponed has an IRR of 30 percent and an NPV of $50 million. However, the firm’s short run EPS will be reduced if it accepts Project B, because no revenues will be generated for several years. Required a. Should the short-run effects on EPS influence the choice between the two projects? b. How might situations like the one described here influence a firm’s decision to use payback as a part of the capital budgeting process? QUESTION 4 (BH-540)
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After discovering a new gold vein in the Colorado Mountains, CTC Mining Corporation must decide whether to mine the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that results in environmental damage. To go ahead with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000 each year over the 5-year life of the vein. CTC’s cost of capital is 14 percent. For the purposes of this problem, assume that the cash inflows occur at the end of the year. Required a. What are the NPV and IRR of this project? b. Should this project be undertaken, ignoring environmental concerns? c. How should environmental effects be considered when evaluating this, or any other, project? How might these effects change your decision in part b? A) cash flow from the proposed minings: Year 1 -$165,000 0 350,000 2 350,000 3 350,000 4 350,000 5 350,000 NPV = $136,578.34 and IRR= 19.22% b) Yes , since NPV is 0 (ans IRR>WACC) c) THe analysis in (a) ignores the environmental damage caused by the mining process.Envronmrntal damage is an example of externality. The firm should deduct the cost of it from the expected cash flows to get a better estimates of marginal benefits and costs. If environemental costs are large enough then it may lead the manager to quit the project in hand. Please Rate My Work QUESTION 5 (BH-540) Sharon Evans, who graduated from the local university 3 years ago with a degree in marketing, is manager of Ann Naylor’s store in the Southwest Mall. Sharon’s store has 5 years remaining on its lease. Rent is $2,000 per month, 60 payments remain, and the next payment is due in 1 month. The mall’s owner plans to sell the property in a year and wants rents at that time to be high so the property will appear more valuable. Therefore, Sharon has been offered a “great deal” (owner’s words) on a new 5-year lease. The new lease calls for zero rent for 9 months, then payments of $2,600 per month for the next 51 months. The lease cannot be broken, and Ann Naylor Corporation’s cost of capital is 12 percent (or 1 percent per month). Sharon must make a decision. A good one could help her career and move her up in management, but a bad one could hurt her prospects for promotion.
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