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Financial Management

ABC Company is considering a project that has the following cash flow data. What is the project’s IRR? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

Year:

0

1

2

3

4

5

Cash flows:

-$1,100

$375

$375

$375

$375

$375

Alpha Enterprises, Inc. is considering a project that has the following cash flows:

Year

Cash Flow

0

-$1,000

1

500

2

300

3

500

4

400

The company’s WACC is 10%. What is the project’s ordinary payback? Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

Beta Enterprises, Inc. is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

WACC:

14%

Year:

0

1

2

3

Cash flows:

-$950

$500

$300

$400

Delta Enterprises, Inc. has a WACC of 8% and is considering a project that requires a cash outlay of $1,250 now with cash inflows of $500 at the end of each year for the next 5 years. What is the project’s Discounted Payback? Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

Gamma Enterprises, Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

WACC:

13%

Year:

0

1

2

3

4

Cash flows:

-$1,100

$300

$320

$340

$550

Hogwarts Inc. is considering a project with the following cash flows:

Initial cash outlay = $2,500,000

After–tax net operating cash flows for years 1 to 4 = $779,000 per year

Additional after–tax terminal cash flow at the end of year 4 = $600,000

Compute the profitability index of this project if Hogwarts’ WACC is 11%. Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

Anderson Associates is considering two mutually exclusive projects that have the following cash flows:

Project A Project B

Year Cash Flow Cash Flow

0 -$10,000 -$8,000

1 1,000 7,000

2 2,000 3,000

3 6,000 1,000

4 8,000 3,000

At what cost of capital do the two projects have the same net present value? (That is, what is the crossover rate?) Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.

Alpha & Omega wants to invest in a new computer system, and management has narrowed the choice to Systems A and B.

System A requires an up-front cost of $100,000, after which it generates positive after-tax cash flows of $70,000 at the end of each of the next 2 years. The system could be replaced every 2 years, and the cash inflows and outflows would remain the same.

System B also requires an up-front cost of $100,000, after which it would generate positive after-tax cash flows of $48,000 at the end of each of the next 3 years. System B can be replaced every 3 years, but each time the system is replaced, both the cash outflows and cash inflows would increase by 10%.

The company needs a computer system for 6 years, after which the current owners plan to retire and liquidate the firm. The company’s cost of capital is 14%. What is the NPV (on a 6-year extended basis) of System A? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Using the information from problem 8 on Alpha & Omega, what is the NPV (on a 6-year extended basis) of System B? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Using the information from problem 8 on Alpha & Omega, what is the equivalent annual annuity (EAA) for System B? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box

XYZ Corporation is considering the acquisition of a new piece of equipment. The new equipment costs $250,000, plus it will cost $10,000 to ship it to XYZ, and it will cost $5,000 to install it at XYZ. The equipment has a 10-year class life and will be depreciated by the MACRS depreciation system. What amount of depreciation will be expensed in Year 4? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Liberty Services is now at the end of the final year of a project. The equipment originally cost $125,500, of which 75% has been depreciated. The firm can sell the used equipment today for $44,000, and its tax rate is 30%. What is the equipment’s after–tax salvage value for use in capital budgeting analysis? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Medium Sized Retailer’s balance sheet showed total current assets of $325,000, all of which were required in operations. Its current liabilities consisted of $62,500 of accounts payable, $40,000 of 7% short–term notes payable to the bank, and $19,750 of accrued wages and taxes. What was its net operating working capital? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

You work for Diversified Industries, and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 after-tax net operating cash flow? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Sales revenues

$155,000

Depreciation

$44,000

Cash operating costs

$68,000

Tax rate

34%

Fool Proof Software is considering a new project whose data are shown below. The equipment that will be used has a 3-year class life and will be depreciated by the MACRS depreciation system. Revenues and Cash operating costs are expected to be constant over the project’s 10-year life. What is the Year 1 after-tax net operating cash flow? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Equipment cost (depreciable basis)

$85,000

Sales revenues, each year

$60,000

Cash operating costs

$29,000

Tax rate

25.0%

Large Manufacturing, Inc. is considering investing in some new equipment whose data are shown below. The equipment has a 3-year class life and will be depreciated by the MACRS depreciation system, and it will have a positive pre-tax salvage value at the end of Year 3, when the project will be closed down. Also, some new working capital will be required, but it will be recovered at the end of the project’s life. Revenues and cash operating costs are expected to be constant over the project’s 3-year life. What is the project’s Initial Cash Outlay at time 0? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box

WACC

11.0%

Net investment in fixed assets (depreciable basis)

$70,000

Required new working capital

$10,000

Sales revenues, each year

$95,000

Cash operating costs excl. depr’n, each year

$30,000

Expected pretax salvage value

$9,000

Tax rate

30.0%