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The conference on evaluating capital projects has been very helpful. You have received a significant amount of information and multiple projects to evaluate to hone your skills. To adequately teach Grammy and the board you will need to answer several questions about the capital-budgeting process. You will do this in a business memo that is no more than four pages long. Provide an evaluation of two proposed project, both with a 5-year expected lives and identical initial outlays of $110,000. Both of these projects involve additions to a highly successful product line, and as a result, the required rate of return on both projects has been established at 12 percent. The expected free cash flows from each project are as follows: Project A Project B Initial outlay -$110,000 -$110,000 Inflow year 1 20,000 40,000 Inflow year 2 30,000 40,000 Inflow year 3 40,000 40,000 Inflow year 4 50,000 40,000 Inflow year 5 70,000 40,000 In evaluating these projects, please respond to the following question: Why is the capital-budgeting process so important? Why is it difficult to find exceptionally profitable projects? What is the payback period on each project? If the organization imposes a 3-year maximum acceptable payback period, which of these projects should be accepted? What are the criticisms of the payback period? Determine the NPV for each of these projects. Should they be accepted? Describe the logic behind the NPV. Determine the PI for each of these projects. Should they be accepted? Would you expect the NPV and PI methods to give consistent accept/reject decisions? Why or why not? What would happen to the NPV and PI for each project if the required rate of return increased? If the required rate of return decreased? Determine the IRR for each project. Should they be accepted? How does a change in the required rate of return affect the project’s internal rate of return? What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better?
Bui Corp. pays a constant $12 dividend on its stock. The company will maintain this dividend for the next nine years and will then cease paying dividends forever. If the required return on this stock is 10 percent, what is the current share price?
You are planning to buy a house appraised for $350,000 and finance it through a mortgage of $250,000. You would then have a loan-to-value ratio of 0.714, safely below the cutoff by your lender of 0.80. What is the amount that you will pay per month i..
Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 7%, and its stock price is $40 per share with 2 million shares outstanding. What is BEA's unlevered be..
Compute the price of a zero-coupon bond (ZCB) that matures at time t=10 and that has face value 100. Compute the price of a forward contract on the same ZCB of the previous question where the forward contract matures at time t=4
The September T-bond futures contract is currently selling at 111-05 and September call option on T-bond futures for a strike price of 115-00 is currently quoting at 2-24. If an investor purchases one contract of the call option at the current market..
Now that you have determined your preferred networking group/organization, write a two page paper, discussing what membership offers. Cite the positive opportunities this offers. Introduction: Name the organization. What are the requirements for memb..
Compute the payback statistic for Project A and recommend whether the firm should accept or reject the project with the cash flows shown below if the appropriate cost of capital is 8 percent and the maximum allowable payback is four years.
Ampex common stock has a beta of 1.4. If the risk free rate is 8 percent, the expected market return is 16 percent, and Ampex has $20 million of 8 percent debt with 10 years until maturity. It has a yield to maturity of 12 percent and a marginal tax ..
Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take five rights to buy a new share in the offering at a subscription price of $25. What price should the stock sell for ex-rights? What is the amount..
Suppose you are considering either working through school or taking out loans. If you work at a 20 hour job at $15 per hour over 50 weeks per year, you can make $15,000, but it will take 5 years to graduate. How many years will it take to pay back th..
Depository institutions typically differentiate between interest and noninterest income and expense. What are the primary components of each? Define net interest income (NIM) and burden. What does a bank's efficiency ratio measure?
In concept, the RAROC measure indicates a loan is acceptable if the RAROC is greater than the
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