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Calculate the internal rate of return for each project

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Reference no: EM131173765 , Length:

Question 1

Single Period Capital Rationing

The following table presents the cash flows associated with Projects A, B, C, D, E and F.

Year

0

1

2

3

4

A

-100000

20000

40000

60000

80000

B

-150000

-50000

100000

100000

140000

C

-60000

20000

40000

40000

 

D

-100000

60000

60000

100000

 

E

-50000

20000

40000

60000

40000

F

-100000

30000

30000

30000

30000

Assuming that the firm only has available $300,000 and applies capital rationing.

Assume also that fractions of investment can be undertaken. I.e. they are divisible.

The cost of capital is 10%.

a) Which projects should be acquired?

b) What is the total NPV of the projects acquired?

Now assume that fractions of investment cannot be undertaken.

c) Which projects should be acquired?

d) What is the total NPV of the projects acquired?

Assume now that Projects A and E are mutually exclusive and the projects are divisible.
e) Which projects should be acquired?

f) What is the total NPV of the projects acquired?

Question 2

Black Ltd has identified the following two projects

Project

Project

A

B

Year

Cash Flow

Cash Flow

0

-100000

-140000

1

30000

53000

2

35000

53000

3

40000

53000

4

45000

53000

5

55000

53000

a) Calculate the Net Present Value for each project.

b) Calculate the Internal Rate of Return for each project

c) Using discount rates of 0 per cent, 10 per cent and 20 percent and the IRR calculated above construct a table that could be used to draw the present value profiles for each project.

d) Comment on the acceptability and preferability of the projects.

Question 3

An extract of Green Ltd's Balance Sheet is as follows

Assets

Accounts Receivable                                         $ 125,000

Inwntories                                                        $ 185,000

Property, Plant & Equipment                            $3,793,000

Prepayments                                                    $ 12,000

TOTAL ASSETS                                                  $4,115,000

Liabilities

Accounts Payable                                              $ 90.000

Bank Overdraft                                                $         -

Accrued Revenue                                             $ 25,000

Debettires                                                       $ 1,500,000

TOTAL LIABILITIES                                           $ 1,615,000

NET ASSETS                                                      $2,500,000

Shareholders Equity

Preference Shares                                              $ 400,000

Ordinary Shares                                                 $ 1,500,000

General Reserve                                                $ 125,000

Retained Profit                                                   $ 475,000

TOTAL SHAREHOLDERS EQUITY                          $2,500,000

The bonds are currently selling at $245.33 and were issued originally at a face value of $200.

The preference shares were originally issued at a price of $5 each and are currently selling for $5.75 each.

The ordinary shares were originally issued at a price of $15 each and are currently selling for $23.00 each.

The company believes it current financing mix is the one that delivers its long-term optimal target weights.

The company wishes to determine its weighted marginal cost of capital

The company has compiled the following data




Cost

Source of Capital

Range of Financing

after Tax







Long Term Debt

$0

to

$300,000

6.5%

$300,001

to

$600,000

7.5%

$600,001

and

above

9.0%

Preference Shares

0.00

to

$100,000

9.5%

$100,001

and

above

10.0%

Ordinary Shares

$0

to

$500,000

11.0%

$500,001

to

$1,000,000

12.5%

$1,000,001

and

above

14.0%

Available Investments

Investment

Initial

Useful

Annual

Opportunity

Investment

Life

Cash Flows

A

-$200,000

4

$68,641

B

-$300,000

6

$72,967

C

-$500,000

8

$97,161

D

-$300,000

3

$120,635

E

-$600,000

5

$154,254

F

-$100,000

7

$19,207

a) Determine the breaking points and ranges of total financing associated with each source of capital;

b) Using the data developed in a., determine the levels of total financing at which the firm's weighted average cost of capital (WACC) will change;

c) Calculate the weighted average cost of capital and the weighted marginal cost of capital (WMCC) for each range of total financing found in b;

d) Using the results of c. along with the information on the available investment opportunities compile the firm's investment opportunities schedule (lOS), plot this schedule and plot the weighted marginal cost of capital

e) Which if any of the available investments would you recommend that the firm accept? Explain your answer

f) Assume now that Project C is unavailable. Which if any of the available investments would you recommend that the firm accept? Explain your answer

Question 4.

Explain the common sources of risk affecting financial managers and shareholders

Verified Expert

This assignment deals with Financial Management. It requires carrying out single period capital rationing analysis and deciding on feasible project based on various given scenarios. In addition, it also requires carrying out a capital budgeting analysis using NPV and IRR techniques and creating a NPV profile in order to make informed investment decisions. The last part deals with critically analyzing various sources of risk for firms, financial managers and shareholders.

Reference no: EM131173765

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inf1173765

10/17/2016 9:26:11 AM

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