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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 -$110,000 Inflow year 1 20,000 40,000 Inflow year 2 30,000 40,000 Inflow year 3 40,000 40,000 Inflow year 4 50,000 40,000 Inflow year 5 70,000 40,000 In evaluating these projects, please respond to the following question: Why is the capital-budgeting process so important? Why is it difficult to find exceptionally profitable projects? What is the payback period on each project? If the organization imposes a 3-year maximum acceptable payback period, which of these projects should be accepted? What are the criticisms of the payback period? Determine the NPV for each of these projects. Should they be accepted? Describe the logic behind the NPV. Determine the PI for each of these projects. Should they be accepted? Would you expect the NPV and PI methods to give consistent accept/reject decisions? Why or why not? What would happen to the NPV and PI for each project if the required rate of return increased? If the required rate of return decreased? Determine the IRR for each project. Should they be accepted? How does a change in the required rate of return affect the project’s internal rate of return? What reinvestment rate assumptions are implicitly made by the NPV and IRR methods? Which one is better?
Southwestern Bank reports that just 20 percent of its customers were profitable. Assuming that this applies to individuals'account relationships, make three recommendations to increase the profitability of these accounts.
Suppose your company imports computer motherboards from Singapore. The exchange rate is currently 1.5136 S$/US$. You have just placed an order for 37,000 motherboards at a cost to you of 231.10 Singapore dollars each. Calculate your profit if the exc..
Milano pizza club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt equity ratio of 40 percent and makes interest payments of $41,000 at the end of each year. The coast of the firm’s levered equity is 19 ..
For marketers adept at recognizing new opportunities, the online bulletin board Pinterest can provide their companies with a competitive advantage.
A bond that returns 4% annually and matures in 6 years. If you purchased the bond during the IPO at par, and similar bonds in today’s market are returning only 3% annually, what is the total yield of the investment?
Suppose you bought a 8 percent coupon bond one year ago for $950. The bond sells for $1,005 today. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? What was your total nominal rate of return on th..
Kandy Corporation is considering a replacement investment. The machine currently in use was originally purchased two years ago for $65,000. Tax-allowable depreciation is $13,000 per year for five years.
Night Shades Inc. (NSI) manufactures biotech sunglasses. The variable materials cost is $18.30 per unit, and the variable labor cost is $6.20 per unit. What is the variable cost per unit? Suppose NSI incurs fixed costs of $640,000 during a year in wh..
Exposure of domestic firms. Why are the cash flows of a purely domestic firm exposed to exchange rate fluctuations?
Consider the following financial statement information for the Ayala Corporation: Item Beginning Ending Inventory $ 10,300 $ 11,300 Accounts receivable 5,300 5,600 Accounts payable 7,500 7,900 Credit sales $ 83,000 Cost of goods sold 63,000 Calculate..
Suppose that the price of a non-dividend-paying stock is $30, its volatility is 25%, and the risk-free rate for all maturities is 4% per annum. Use DerivaGem European binomial with 60 steps to calculate the cost of setting up the following positions...
A business executive is offered a management job at Generous Electric Company, which offers him a 5 year contract that calls for a salary of $62,000 per year, plus 600 shares of GE stock at the end of the 5 years. what must the Generous Electric stoc..
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