5.00 c. 2.00 d. 1.25 ANS: A. takes to recover or pay back the initial investment. What is the discounted payback period for these cash flows if the initial cost is $6,200? . a. The Equivalent Annual It is clear that the project B is going to be more profitable than project A, but according to payback . B.-100, -50, +80. What is the discounted payback period for these cash flows if the initial cost is $5,800? You expect the project to produce sales revenue of $120,000 per year for three years. An investment project requires an initial investment of $100,000. Expert Answer Hence irr of investment is 14.659% Year View the full answer The entire outlay willbe incurred at the project's commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is . The target rate of . A project requires an initial investment of Rs.6, 00,000. a. Payback Period = Initial Investment Annual Cash Flow = $105M $25M = 4.2 years. Project B: Buy a machine that requires an initial investment outlay of 1,25,000 and will generate CFAT of 27,000 per year for 8 years. $169, 935 $125,846 $339,870 $1,200,000 Net annual revenues minus expenses are estimated to be $40,000 (A$) in the first. b. With a financial calculator, input N = 10, I/YR = 12, PV = -1000, and FV = 0 to obtain PMT = $176.98. A 17939. You have come up with the following estimates of the projects with cash flows.Pessimistic Most likely Optimistic Revenue 15 20 Cost -10 -8 If the cash flows are perpetuities and the cost of capital is 10%. The project required an initial investment of $15,000 and an additional investment of $2,000 at the end of year 2. An investment project has an initial cost of $260 and cash flows $75, $105, $100, and $50 for Years 1 to 4, respectively . A capital project has an initial investment of $100,000 and cash flows in years 1-6 of $25,000, $10,000, $50,000, $10,000, $10,000, and $60,000, respectively. The initial investment of the project is $20 million, and the NPV of the project is $10 million. A 5-year project has an initial investment of $30,000. -100, +150, +350 A project requires an initial investment in equipment of $90,000 and then requires an investment in working capital of $10,000 at the beginning (t = 0). Assume 30% of the project cost is funded by the equity and remaining 70% by the debt. Accept the project if the NPV result is zero or positive. $4,672 $10,836 O $1,000 O $17,000. The required rate of return is 13.5%. Net cash flow = $10,000 - $6,000 - $2,000 . Which of the following values comes closest to the payback of a project that requires an initial investment of $34, produces cash flows of $12 for 5 consecutive years beginning at the end of year 1, and provides a final cash flow at the end of year 6 of $100? I have the initial investment 1000 and the cost of capital 9 percentage and then year one was this figure .917 and year two is .842. When calculating an IRR, expected cash flows for a project or investment are given and the NPV equals zero. A project requires an initial investment of $225,000 and is expected to generate the following net cash inflows: Year 1: $95,000 Year 2: $80,000 Year 3: $60,000 . Now consider the same example again. A corporate project requires an initial investment of $2 million today and A corporate project requires an initial investment of $2 million today and is expected to generate after-tax cash flows of $750,000 at the end of year 1, $1,000,000 at the end of year 2, and $1,250,000 at the end of year 3. Answer of A potential project has an initial capital investment of $100,000. Project A: Buy a machine that requires an initial investment outlay of 1,00,000 and will generate CFAT of 30,000 per year for 5 years. View Answer. If the required return is 11 percent, what is this project's equivalent annual cost . After the new technology is developed, it generates the cash inflow for the company of 50 000 per month but only for 2 and years. A project with an initial investment of 100 lakhs and life of 10 years generates cash flows after tax (CFAT) of 20 lakh per annum. Given a 15 percent cost of 62,590 results finance A project has an initial requirement of $261,000 for fixed assets and $27,000 for net working capital. reTherefore, (1+x) 3 - 1 = 20%. The weighted average cost of capital (WACC) will be 9.8%. A negative NPV result means the project won't be profitable . Share With A project has an initial investment of 100. It is estimated to have alife of 6 years. Example 2: Uneven Cash Flows. (Answers appear in order: [Pessimistic, Most Likely, Optimistic]) . At what rate of interest would a company be Indifferent choosing projest A or BO. A 5-year project will require an investment of $100 million. You expect the project to produce sales revenue of $120,000 per year for three years. To use the NPV formula to estimate the net present value of a proposed investment, you need to determine the expected net present value of the future cash flows from the investment and deduct the project's initial investment. The NPV is positive, so we . What is the internal rate of return of the investment: A. Youhavebeenaskedtoanalyzethenetpresentvalueofbuildingatollroadin Asia.&You&estimate&that&building&the&road&will&cost&you&$50&million&up&front&and& Meanwhile, working capital of $10,000 is recouped in year 3. Therefore, she has to wait until interest rates are less than 5.375%. Otherwise, you reject . This comprises of plant and machinery worth $80 million and a net working capital of $20 million. Company B pays corporate taxes at a rate Cash flow per year. Then, to compute the final NPV, subtract the initial outlay from the value obtained by the NPV function. b. It is useful for ranking and choosing between projects when capital is rationed. Question 4 0.7 out of 0.7 points A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0). Time 0: $100.00 Time 1: $120.11 Time 2: $144.27 Time 3: $173.29 . Problem 3 A project has an initial investment of 100. - Suppose in Example 6.4 that NetIt has an additional small project with a NPV of only $120,000 that requires 4. The tax . Which project should the firm choose to invest in? At the end of the second year the investment generates $50 and the initial investment of $1000 is received back as well. A.-50, 20, +100. A project has an initial investment of 100 You have come up with the following estimates of the project's cash flows: Suppose the cash flows are perpetuities and the cost of capital is 10% What does a sensitivity analysis of NPV (no taxes) show? example of a capital budgeting decision. Company C is planning to undertake another project requiring initial investment of $50 million and is expected to generate $10 million net cash flow in Year 1, $13 million in . To check if the annualized return is correct, assume the initial cost of an . What is the project's internal rate of return (IRR)? The actual market value of the initial investment at the end of year 3 is $35,000 Initial net working capital investment is $75,000 and NWC will maintain a level equal to 20% of sales each year thereafter. Company A has substantial accumulated tax losses and is unlikely to pay taxes in the foreseeable future. 264 PA RT 4 Capital Budgeting 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA PA RT 4 By 2006, the manufacture of large jet airplanes had Boeing's development of the Dreamliner offers an shrunk to two major competitors, Boeing and Airbus. With the initial investment of $10,000, the total value of the investment by 31 December must increase to $14,000. The estimated net cash flows are as under:Year Net Cas. Project B has an initial cost of $2 million and cash flows with a present value of $5 million. 2. The facts on the project are presented below: Investment Required $60,000,000 Annual Gross Income 14,000,000 Annual Operating Costs 5,500,000 Salvage Value after 10 Years 0 A project has an initial investment of 100. NPV = - Initial Investment + PV(Revenues) - PV(Costs) + Depreciation Tax Shield B . (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net cash flow . As an example, to calculate the payback period of a $100 investment with an annual payback of $20: $100. Based on the NPV, project _____ would be accepted. a. 7-8 Your company has been presented with an opportunity to invest in a project. You expect the project to produce sales revenue of $120,000 per year for three years. The working capital is anticipated to be 10% of revenues, and the working capital investment has to be made at the beginning of each period. A capital project has an initial investment of $100,000 and cash flows | page 13 A capital project has an initial investment of $100,000 and cash flows in years 1-6 of $25,000, $10,000, $50,000, $10,000, $10,000, and $60,000, respectively. You estimate manufacturing costs at 60% of revenues. Level: Medium LO: 3 Ans: C. 32. A two-year project has an initial investment of $38,643,310 and involves both a cash inflow and outflow. Accounting Rate of Return - ARR: The accounting rate of return (ARR) is the amount of profit, or return, an individual can expect based on an investment made. Estimate the free cash flow to the firm for each of the 4 years. You estimate manufacturing costs at 60% of revenues. = net after-tax cash inflow-outflows during a single period t r = internal rate of return that could be earned in alternative investments t . A project has an initial investment of $1000 and generates $100 at the end of the first year. (1 +r)tC F t. . A project requires an initial investment of $100,000 and is expected to produce a cash inflow before tax of $26,000 per year for five years. D) 1.40 years. Financing for the project has been arranged as follows: 80,000 new common shares are issued, the market price of which . You have come up with the following estimates of the project's cash flows (there are no taxes): Most Likely Pessimistic 15 10. There is one investment project available to the firm. A project has an initial investment of 100 and perpetual cash flows. A project has an initial investment of 100. Assuming straight-line depreciation of $100,000 per year: . B) 3.36 years. A potential project has an initial capital investment of $100,000. Assuming a 12% discount rate, the project's payback period is: A) 0.28 years. The payback method focuses solely upon the time required to pay back the initial investment; it does not track the ultimate profitability of a project at all. (Answers appear in order: [Pessimistic, Most Likely, Optimistic].) A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0). A project has an initial investment of 100. Source: CMA, adapted. This problem has been solved! (Answers appear in order: Pessimistic, Most Likely, Optimistic.) For Investment A with a return of 20% over a three-year time span, the annualized return is: x = Annualized. Net annual revenues minus expenses are estimated to be $40,000 (A$) in the first year and to increase at the rate of 6.48% per year. C. Any type of project should be accepted if the NPV is positive and rejected if it is negative. The cash inflow of $62,423,810 occurs at the end of year 1, while the cash outflow of $11,890,200 occurs at the end of year 2. The company uses 10% cost of capital to evaluate the projects. An investment project has annual cash inflows of $3,500, $4,400, $5,600, and $4,800, and a discount rate of 14 percent. Options . The project is expected to generate net cash inflows of $28,000 per year for the next five years. Net annual revenues minus expenses are estimated to be $40,000 (A$) in the first year and to increase at the rate of 6.48% per year. Solving for x gives us an annualized ROI of 6.2659%. The fixed asset is fully depreciated over the life of the project and has no salvage value. Manufacturing costs are estimated to be 60% of the revenues. The initial investment, present value, and profitability index of these projects are as follows: The incorrect way to solve this problem would be to choose the highest NPV projects: Projects B, C, and F . Assume the cost of equity to be 14% and the cost of debt 8%. Initial investment. b. Project B has an initial investment of $100,000 and an NPV of $101,000. The Payback Reciprocal is _____ a) 25% b) 20% c) 10% d) 30% (iv) The NPV of a 5 year project is 250 lakh and PVIFA at 10% for 5 years is 3.79. Calculate the payback period of the project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. - 50 , 20 , + 100 An investment is an outflow of cash so this value is negative and is added to the sum of the present values. = 5 years. If the required rate of return is greater than 0% and the projects are mutually exclusive A project has an initial investment of $125,000 and cash flows of $50,000 per year for 3 years. You have come up with the following estimates of the project's cash flows: Suppose the cost of capital is 10% and no taxes. If we take the beginning investment of $100 and compound it at a rate of 20.11%, it will have grown to exactly $250.00 by year five. 65. Problem 3 A project has an initial investment of 100. Haroldsen Corporation is considering a capital budgeting project that would require an initial investment of $350,000. An investment project has annual cash inflows of $4,300, $4,000, $5,200, and $4,400, for the next four years, respectively. A potential project has an initial capital investment of $100,000. An investment project that has positive cash flows for every time period after the initial investment should be accepted. IRR calculation example. The cash inflow of $62,423,810 occurs at the end of year 1, while the cash outflow of $11,890,200 occurs at the end of year 2. You estimate manufacturing costs at 60% of revenues. (Answers appear in order: [Pessimistic, Most Likely, Optimistic].) A 5-year project will require an investment of $100 million. $20. An investment project is expected to yield $10,000 in annual revenues, has $2,000 in fixed costs per year, and requires an initial investment of $5,000. The annual investment in long-term assets that maximizes the firm's value Capital rationing: the situation in which a firm can raise a specified, limited amount of capital regardless of how many good projects it has For example, a firm has $5 million of capital budget and has three good projects Project Initial investment NPV Example: A company allocates $1,000,000 to spend on projects. Solution. The required rate of return is 13.5%. At the end of the project, equipment that had been used in the project could be sold for $32,000. The first part of the equation shows C0, which is the initial investment in the project/asset. Question. Music Company is considering investing in a new project. Let us examine the following investment scenario: a project requires an initial investment of $10,000 and is expected to return $15,000 in three years time with positive cash flows in each year of $3,800, $4,400, and $6,800 respectively. The useful life of the primary equipment, however, is uncertain, as shown in the following table:. You have come up with the following estimates of the project's cash flows (there are no taxes): Revenues Costs Pessimistic 15 8 Less likely 17 8 Most likely 20 8 Optimistic 25 8 Suppose the cash flows are prepetuities and the the cost of capital is 10%. Let us see . Reply. Discount rate is 7,5%. What does a sensitivity analysis of NPV (no taxes) show? Project A and B have 4 year timelines. 6) Project H requires an initial investment of $100,000 and the produces annual cash flows of $50,000, $40,000, and $30,000. A five-year project has an initial fixed asset investment of $290,000, an initial NWC investment of $25,000, and an annual OCF of -$35,000. b. A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0). A two-year project has an initial investment of $38,643,310 and involves both a cash inflow and outflow. The discount rate is 13 percent. The project requires an initial investment of $165,000 which is depreciated at a straight-line to zero over the 3 year project life. . Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000, $40,000, and $50,000. Project A has an initial investment of S100,000 and cash inflows of $60,000.550,000 $40,000 and $40,000 Project B has an initial investment of $75,000 and cash inflows of $50,000, 40,000, 530,000 and $30,000. Options The project required an initial investment of $15,000 and an additional investment of $2,000 at the end of year two. What does a sensitivity analysis of NPV (no taxes) show? a. The investment would generate annual cash inflows of $133,000 for the life of the project, which is 4 years. . The entire outlay will be incurred at the project's commencement. 31. 7.50% B. As a result, payback period is best used in conjunction with other metrics. A project has an initial investment of 100. Optimistic 25 5 Revenues - Costs Suppose the cash flows are perpetuities and the cost of capital is 10 percent. You have come up with the following estimates of the project's cash flows: Suppose the cash flows are perpetuities and the cost of capital is 10%. T = 3 years. . NPV = $722,169 . The annual costs are $2,000 per year, annual revenues are $10,000 per year, and the salvage value is $7,000. What is the NPV of the project? 2.50 b. Project A generates an annual cash inflow of $1,000 for 5 years whereas project B also generates an annual cash inflow of $1,000 but for 7 years. Thus, the method may indicate that a project having a short payback but with no overall profitability is a better investment than a project requiring a long-term payback but having . Net annual revenues minus expenses are estimated to be $40,000 (A$) in the first year and to increase at the rate of 6.48% per year. Accounting rate of return divides the . The project is expected to produce sales revenues of $120,000 for three years. What will be the firm's stock price if capital markets fully reflect the value of undertaking the project? The project has a minimum required return of 9% . Modified Internal Rate Of Return - MIRR: Modified internal rate of return (MIRR) assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial outlays are financed . Estimate the free cash flow to the firm for each of the four years. The formula to calculate payback period is: Payback Period =. Calculate the NPV for the project if the cost of capital is 15 percent. 25 -5 A. The result using the NPV function for the example comes to $722,169. At the end of the second year the investment generates $200 and the initial investment of $1000 is received back as well. For example, two projects, project A and project B, both require an initial investment of $5,000. If the project is fully funded by the debt, equity IRR simply doesn't exist. B. You have come up with the following estimates of the project's cash flows: Suppose the cash flows are perpetuities and the cost of capital is 10%. Optimistic 25 5 Revenues - Costs Suppose the cash flows are perpetuities and the cost of capital is 10 percent. A product The competition between the two was stiff. The working capital is anticipated to be 10% of revenues, and the working capital investment has to be made at the beginning of each period. where r is the discount rate and t is the number of cash flow periods, C 0 is the initial investment while C t is the return during period t. For example, with a period of 10 years, an initial investment of $1,000,000 and a discount rate of 8% (average return from an investment of comparable risk), t is 10, C 0 A practical example. 6. Since we know the project's initial investment, its IRR, the length of time that the cash flows occur, and that each cash flow is the same, then we can determine the project's cash flows by setting it up as a 10-year annuity. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) This project does not required initial investment but it required investment after the first year of development, which is 300, 000. Given a 15 percent cost of 62,657 results, page 13 Science What does a sensitivity analysis of NPV (no taxes) show? 7.59% C. 15.0% D. 106% Since the resale value of the headache-only equipment is $0, it has no effect the NPV of the project. During the year, the purchasing value of the dollar would fall due to . An investment project has an initial cost of $260 and cash flows $75, $105, $100, and $50 for Years 1 to 4, respectively . Hence, the net present value = 0). The useful life of the primary equipment, however, is uncertain, as shown in the following table: Assume that im = Continue reading (Solution Download) A potential project has an initial . A project has an initial outlay of $1 million and generates net receipts of $250,000 for 10 years. You have come up with the following estimates of the project's cash flows (there are no taxes): Pessimistic 15 10 Most Likely Optimistic 2025 Revenues Costs R5 Suppose the cash flows are perpetuities and the cost of capital is 10 percent. Project X requires an initial investment of $35,000 but is expected to generate revenues of $10,000, $27,000, and $19,000 for the first, second, and third years, respectively. The initial cash investment for the beginning period will be equal to the present value of the future cash flows of that investment (cost paid = present value of future cash flows. Given a cost of goods sold of 60 percent of sales, what is the payback period in years? Finance questions and answers. In an . Based on the PI (Profitability Index), project _____ would be selected. After adding up all 11 cash flows from the initial -$100 outlay to the 10th year's present value of $9.26, we arrive at a net present value of the project of $34.20. The useful life of the primary equipment, however, is uncertain, as shown in the following table:. A.-50, 20, +100. C) 3.57 years. 19.01%. To find the NPV of the project, find the sum of the present values of the initial investment, after-tax revenues, after-tax costs, and the depreciation tax shield. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. What is the NPV of the project? The project's required rate of return is 13%. where: C F t. . If the payback period is less than a pre-specified length of time, you accept the project. N P V = t=0n. You have come up with the following estimates of the project's cash flows (there are no taxes): Most Likely Pessimistic 15 10. If the interest rate is i = 10%, what is the present worth of the project? A firm has 10 million shares outstanding with a current market price of $20 per share. What does scenario analysis of the NPVs show? A project has an initial investment of $1000 and generates $100 at the end of the first year. A potential project has an initial capital investment of $100,000. This is less than Investment B's annual return of 10%. a. C. Any type of project should be accepted if the NPV is positive and rejected if it is negative. What is the internal rate of return of the investment? An investment project that has positive cash flows for every time period after the initial investment should be accepted. A project costs $100 and will have a cash flow in year 1 of $30, a cash flow of $50 in year 2, and a cash flow of $70 in year 3. .
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