Finance -AW-Q389

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Problem 10-1
 
NPV
 
A project has an initial cost of $40,375, expected net cash inflows of $12,000 per year for 11 years, and a cost of capital of 14%. What is the project’s NPV? (Hint: Begin by constructing a time line.) Do not round your intermediate calculations. Round your answer to the nearest cent.
$
 
Problem 10-2
 
IRR
 
A project has an initial cost of $55,000, expected net cash inflows of $11,000 per year for 10 years, and a cost of capital of 14%. What is the project’s IRR? Round your answer to two decimal places.
%
 
Problem 10-3
 
MIRR
 
A project has an initial cost of $48,950, expected net cash inflows of $9,000 per year for 8 years, and a cost of capital of 8%. What is the project’s MIRR? Round your answer to two decimal places.
%
 
Problem 10-4
 

Profitability Index
 
A project has an initial cost of $55,900, expected net cash inflows of $15,000 per year for 11 years, and a cost of capital of 13%. What is the project’s PI? Do not round your intermediate calculations. Round your answer to two decimal places.
 

Problem 10-5
 
Payback
 
A project has an initial cost of $45,675, expected net cash inflows of $14,000 per year for 9 years, and a cost of capital of 13%. What is the project’s payback period? Round your answer to two decimal places.
years
 

Problem 10-6
 
Discounted Payback
 
A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 9 years, and a cost of capital of 11%. What is the project’s discounted payback period? Round your answer to two decimal places.
years

 
Problem 10-7
 
NPV
 
Your division is considering two investment projects, each of which requires an up-front expenditure of $19 million. You estimate that the investments will produce the following net cash flows
 
Year Project A Project B
1 $ 4,000,000 $20,000,000
2 10,000,000 10,000,000
3 20,000,000 6,000,000
 
1. What are the two projects’ net present values, assuming the cost of capital is 5%? Round your answers to the nearest dollar.
 
Project A $
Project B $
 
What are the two projects’ net present values, assuming the cost of capital is 10%? Round your answers to the nearest dollar.
 
Project A $
Project B $
 
What are the two projects’ net present values, assuming the cost of capital is 15%? Round your answers to the nearest dollar.
 
Project A $
Project B $
 
2. What are the two projects’ IRRs at these same costs of capital? Round your answers to two decimal places.
 
Project A %
Project B %
 

Problem 10-8
 
NPVs, IRRs, and MIRRs for Independent Projects
 
Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget. The projects are independent. The cash outlay for the truck is $17,100, and that for the pulley system is $22,430. The firm’s cost of capital is 14%. After-tax cash flows, including depreciation, are as follows
 
Year Truck Pulley
1 $5,100 $7,500
2 5,100 7,500
3 5,100 7,500
4 5,100 7,500
5 5,100 7,500
1. Calculate the IRR for each project. Round your answers to two decimal places.
Truck: %

 
Pulley: %
 
Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million.
 
Truck: $
What is the correct accept/reject decision for this project?

 
Pulley: $
 
2. Calculate the MIRR for each project. Round your answers to two decimal places.
Truck: %
 
Pulley: %

Problem 10-9
 
NPVs and IRRs for Mutually Exclusive Projects
 
Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $21,000, whereas the gas-powered truck will cost $17,230. The cost of capital that applies to both investments is 11%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,100 per year and those for the gas-powered truck will be $5,300 per year. Annual net cash flows include depreciation expenses.
 
1. Calculate the NPV for each type of truck. Round your answers to the nearest dollar.
Electric-powered truck $ %

Gas-powered truck $ %
 
2. Calculate the IRR for each type of truck. Round your answers to two decimal places.
Electric-powered truck %%

Gas-powered truck %
 

Problem 10-10
 
Capital Budgeting Methods
 
Project S has a cost of $9,000 and is expected to produce benefits (cash flows) of $2,700 per year for 5 years. Project L costs $26,000 and is expected to produce cash flows of $7,100 per year for 5 years.
 
1. Calculate the two projects’ NPVs, assuming a cost of capital of 10%. Round your answers to the nearest cent.

Project S $

Project L $
 
2. Which project would be selected, assuming they are mutually exclusive?
 
3. Calculate the two projects’ IRRs. Round your answers to two decimal places.
Project S %

Project L %
 
4. Which project would be selected, assuming they are mutually exclusive?
 
5. Calculate the two projects’ MIRRs, assuming a cost of capital of 10%. Round your answers to two decimal places.
 
Project S %

Project L %
 
6. Which project would be selected, assuming they are mutually exclusive?
 
7. Calculate the two projects’ PIs, assuming a cost of capital of 10%. Round your answers to two decimal places.
Project S

Project L
 
8. Which project would be selected, assuming they are mutually exclusive?
 
9. Which project should actually be selected?

 

Problem 10-11
 
MIRR and NPV
 
Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below
 
Year X Y
0 -$5,000 -$5,000
1 1000 4,500
2 1500 1500
3 2000 1000
4 4000 500
 
The projects are equally risky, and their cost of capital is 15%. You must make a recommendation, and you must base it on the modified IRR (MIRR). Calculate the two projects’ MIRRs. Round your answers to two decimal places.
 
Project X %

Project Y %
 

Problem 10-12
 
NPV and IRR Analysis
 
After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that results in environmental damage. Before proceeding 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 19%. For the purposes of this problem, assume that the cash inflows occur at the end of the year.
 
1. What is the project’s NPV? Round your answer to the nearest dollar.
$
What is the project’s IRR? Round your answer to two decimal places.
%

 

Problem 10-16
Unequal Lives
 
Shao Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million and will produce net cash flows of $29 million per year. Plane B has a life of 10 years, will cost $132 million and will produce net cash flows of $24 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the company’s cost of capital is 8%.
 
1. By how much would the value of the company increase if it accepted the better project (plane)? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
 
$ million
 
2. What is the equivalent annual annuity for each plane? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
 
Plane A $ million

Plane B $ million
 
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Problem 11-1
 
Investment Outlay
 
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $14 million, and production and sales will require an initial $5 million investment in net operating working capital. The company’s tax rate is 35%.
1. What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$
 
Problem 11-3
 
Net Salvage Value
 
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $19 million, of which 85% has been depreciated. The used equipment can be sold today for $4.75 million, and its tax rate is 35%. What is the equipment’s after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
$
 

Problem 11-6
 
New-Project Analysis
 
The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer’s base price is $1,150,000, and it would cost another $16,000 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $644,000. The machine would require an increase in net working capital (inventory) of $8,000. The sprayer would not change revenues, but it is expected to save the firm $462,000 per year in before-tax operating costs, mainly labor. Campbell’s marginal tax rate is 30%.
 
1. What is the Year-0 net cash flow?
$
 
2. What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
 
Year 1 $

Year 2 $

Year 3 $
 

3. What is the additional Year-3 cash flow (i.e, the after-tax salvage and the return of working capital)? Round your answer to the nearest dollar.
$
 
4. If the project’s cost of capital is 14 %, what is the NPV of the project? Round your answer to the nearest dollar.
$

 

Problem 11-8
 
Inflation Adjustments
 
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $175,000. The project will produce 850 cases of mineral water per year indefinitely. The current sales price is $144 per case, and the current cost per case is $103. The firm is taxed at a rate of 34%. Both prices and costs are expected to rise at a rate of 3% per year. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits, since the spring has an indefinite life and will not be depreciated.
1. What is the NPV of the project? Do not round intermediate steps. Round your answer to the nearest hundred dollars. (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.)
$

 
Problem 11-9
 
Replacement Analysis
 
The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer, purchased just 2 years ago, is being depreciated on a straight-line basis and has 6 years of remaining life. Its current book value is $2,400, and it can be sold on an Internet auction site for $4,500 at this time. Thus, the annual depreciation expense is $2,400/6=$400 per year. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life.
 
Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $8,100, and has an estimated useful life of 6 years with an estimated salvage value of $810. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and would allow for an output expansion, so sales would rise by $2,000 per year; even so, the new machine’s much greater efficiency would reduce operating expenses by $1,600 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert’s marginal federal-plus-state tax rate is 40%, and its WACC is 12%. Should it replace the old steamer?

 
What is the NPV of the project? Round your answer to the nearest dollar.
$
 

Problem 11-13
 
Replacement Analysis

The Everly Equipment Company’s flange-lipping machine was purchased 5 years ago for $80,000. It had an expected life of 10 years when it was bought and is being depreciated by the straight-line method by $8,000 per year. As the older flange-lippers are robust and useful machines, it can be sold for $20,000 at the end of its useful life.
A new high-efficiency digital-controlled flange-lipper can be purchased for $160,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $50,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%.
 
The old machine can be sold today for $50,000. The firm’s tax rate is 35%, and the appropriate WACC is 16%.
1. If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar.
$
 
2. What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest whole dollar.
 
CF1 $

CF2 $

CF3 $

CF4 $

CF5 $

 
3. What is the NPV of this project? Round your answer to the nearest whole dollar.
$
 

Problem 12-1
 
AFN equation
 
Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $2 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 7%, and the forecasted payout ratio is 75%. Use the AFN equation to forecast Brous-sard’s additional funds needed for the coming year. Round your answer to the nearest dollar. Do not round intermediate calculations.
$
 
Problem 12-2
 
AFN equation
 
Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $6 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 4%, and the forecasted payout ratio is 65%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
 
Problem 12-3
 
AFN Equation
 

Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $4 million at the end of 2013. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.
$

 

Problem 12-7
 
Forecasted Statements and Ratios
 
Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton’s balance sheet as of December 31, 2013, is shown here (millions of dollars)
 
Cash $ 3.5 Accounts payable $ 9.0
Receivables 26.0 Notes payable 18.0
Inventories 58.0 Line of credit 0
Total current assets $ 87.5 Accruals 8.5
Net fixed assets 35.0 Total current liabilities $ 35.5
Mortgage loan 6.0
Common stock 15.0
Retained earnings 66.0
Total assets $122.5 Total liabilities and equity $122.5
 
Sales for 2013 were $325 million and net income for the year was $9.75 million, so the firm’s profit margin was 3.0%. Upton paid dividends of $3.9 million to common stockholders, so its payout ratio was 40%. Its tax rate is 40%, and it operated at full capacity. Assume that all assets/sales ratios, spontaneous liabilities/sales ratios, the profit margin, and the payout ratio remain constant in 2014. Do not round intermediate calculations.
 
1. If sales are projected to increase by $50 million, or 15.38%, during 2014, use the AFN equation to determine Upton’s projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ million
 
2. Using the AFN equation, determine Upton’s self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places.
%
 
3. Use the forecasted financial statement method to forecast Upton’s balance sheet for December 31, 2014. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt).
Assume Upton’s profit margin and dividend payout ratio will be the same in 2014 as they were in 2013. What is the amount of the line of credit reported on the 2014 forecasted balance sheets? (Hint: You don’t need to forecast the income statements because you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2014 addition to retained earnings for the balance sheet.) Round your answers to the nearest cent.
 
Upton Computers
Pro Forma Balance Sheet
December 31, 2014
(Millions of Dollars)
Cash $

Receivables $

Inventories $

Total current assets $

Net fixed assets $

Total assets $

Accounts payable $

Notes payable $

Accruals $

Total current liabilities $

Mortgage loan $

Common stock $

Retained earnings $

Total liabilities and equity $

 
Problem 17-2
 
Interest Rate Parity
 
The nominal yield on 6-month T-bills is 8%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 4%. In the spot exchange market, 1 yen equals $0.008. If interest rate parity holds, what is the 6-month forward exchange rate? Round the answer to five decimal places.
$

 

Problem 17-3
Purchasing Power Parity
A computer costs $490 in the United States. The same model costs 650 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar? Round your answer to two decimal places.
$1 = euros

Problem 17-4
 
Exchange Rate
 
If euros sell for $1.55 (U.S.) per euro, what should dollars sell for in euros per dollar? Round your answer to two decimal places.
euros per dollar

 

Currency Appreciation
 
Suppos e that the exc hange ra te is 0.60 dollars per Swiss franc. If the franc appreciated 15% against the dollar, how many francs would a dollar buy tomorrow? Round your answer to two decimal places.
francs

 
Problem 17-6
 
Cross Rates
 
Suppose the exchange rate between U.S. dollars and the Swiss franc is SFr1.5 = $1, and the exchange rate between the dollar and the British pound is £1 = $1.60. What then is the cross rate between francs and pounds? Round your answer to two decimal places.
Swiss francs per pound
 
Problem 17-8
 
Purchasing Power Parity
 
In the spot market, 12.0 pesos can be exchanged for 1 U.S. dollar. A pair of headphones costs $10 in the United States. If purchasing power parity holds, what should be the price of the same headphones in Mexico? Round your answer to two decimal places.
pesos

 

Problem 17-9
 
Exchange Gains and Losses
 
Your Boston-headquartered manufacturing company, Wruck Enterprises, obtained a 54 million peso loan from a Mexico City bank last month to fund the expansion of your Monterrey, Mexico plant. When you took out the loan the exchange rate was 73 U.S. cents per peso, but since then, the exchange rate has dropped to 66 U.S. cents per peso. Has Wruck Enterprises made a gain or a loss due to the exchange rate change, and how much? Note that your shareholders live in the United States. Round your answer to the nearest dollar. Enter your answer in dollars.
The company made a of $ .
 

Problem 17-10
 
Results of Exchange Rate Changes
 
In 1983 the Japanese yen-U.S. dollar exchange rate was 255 yen per dollar, and the dollar cost of a compact Japanese-manufactured car was $10,250. Suppose that now the exchange rate is 107 yen per dollar. Assume there has been no inflation in the yen cost of an automobile so that all price changes are due to exchange rate changes.
1. What would the dollar price of the car be, assuming the car’s price changes only with exchange rates? Round your answer to the nearest dollar.
$

 
Problem 17-11
 
Spot and Forward Rates
 
Boisjoly Watch Imports has agreed to purchase 16,000 Swiss watches for 1 million francs at today’s spot rate. The firm’s financial manager, James Desreumaux, has noted the following current spot and forward rates:
U.S. Dollar/Franc Franc/U.S. Dollar
Spot 1.6600 0.6024
30-day forward 1.6560 0.6039
90-day forward 1.6470 0.6072
180-day forward 1.6370 0.6109
 
On the same day, Desreumaux agrees to purchase 16,000 more watches in 3 months at the same price of 1 million Swiss francs.
 
1. What is the price of the watches, in U.S. dollars, if purchased at today’s spot rate? Round your answer to the nearest dollar.
$
 
2. What is the cost, in dollars, of the second 16,000 batch if payment is made in 90 days and the spot rate at that time equals today’s 90-day forward rate? Round your answer to the nearest dollar.
$
 
3. If the exchange rate for is 0.50 Swiss francs per dollar in 90 days, how much will Desreumaux have to pay (in dollars) for the watches? Round your answer to the nearest dollar.
$

 
Problem 17-12
 
Interest Rate Parity
 
Assume that interest rate parity holds and that 90-day risk-free securities yield 3% in the United States and 3.3% in Germany. In the spot market, 1 euro equals $1.37 dollar.
 
What is the 90-day forward rate? Round your answer to four decimal places.
$

 
Problem 17-14
 
Foreign Capital Budgeting
 
The South Korean multinational manufacturing firm, Nam Sung Industries, is debating whether to invest in a 2-year project in the United States. The project’s expected dollar cash flows consist of an initial investment of $1 million with cash inflows of $700,000 in Year 1 and $600,000 in Year 2. The risk-adjusted cost of capital for this project is 13%. The current exchange rate is 1,073 won per U.S. dollar. Risk-free interest rates in the United States and S. Korea are
 
1-Year 2-Year
United States 5% 6.75%
S. Korea 4% 5.75%
 
a. If this project were instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value generated by this project? Round your answer to the nearest cent.
$
 
What would be the rate of return generated by this project? Round your answer to two decimal places.
%

b. What is the expected forward exchange rate 1 year from now? Round your answer to two decimal places.
won per U.S. $
 
What is the expected forward exchange rate 2 years from now? Round your answer to two decimal places.
won per U.S. $
 
c. If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Solitaire? Round your answers to two decimal places.
NPV won

Rate of return %

 
Finance -AW-Q389
Finance -AW-Q389