Reference no: EM132684093
Questions -
Question 1 - A company has two projects to choose from with the following annual after-tax cash flows:
Project X
Investment (today) $800,000
Investment (Year 1) $500,000
Years 2-5 $750,000
Project Y
Investment (today) $1,800,000
Years 1-5 $950,000
The firm's cost of capital is 12 percent.
Required - Compute both projects' payback period and discounted payback period.
Question 2 - The R.M. Company uses the following risk-adjusted discount rates for capital budgeting purposes:
Investments in new product lines 15%
Substitution of labour with capital (machinery) 11%
Expansion of existing product lines 13%
Replacement of existing equipment 9%
The firm has $1,000,000 of available capital for investment. Project X involves the production of a brand new product line. Project Y involves the replacement of existing machinery. Project Z involves the purchase of a more sophisticated piece of equipment as a replacement for existing machinery. This more sophisticated machine will enable R.M. Company to reduce the size of its workforce. There are no other projects available at this time.
Expected cash flows for these independent projects are as follows:
|
|
Projects (in thousands of dollars)
|
|
|
X
|
Y
|
Z
|
|
Investment (today)
|
800
|
1,000
|
200
|
|
Net after-tax cash inflows
|
|
Year 1
|
320
|
260
|
60
|
|
Year 2
|
300
|
300
|
80
|
|
Year 3
|
280
|
360
|
100
|
|
Year 4
|
260
|
420
|
120
|
Required - Which project(s) would you recommend the company undertake? Show your calculations and provide any necessary explanations.
Question 3 - A company has $40 million available to invest in new projects. There are three independent projects that it is considering. The after-tax cash flows of the projects are as follows:
|
Project
|
Investment (today)
|
Year 1 cash flow
|
Year 2 cash flow
|
|
X
|
40 million
|
40 million
|
20 million
|
|
Y
|
20 million
|
16 million
|
14 million
|
|
Z
|
20 million
|
12 million
|
20 million
|
Required - Calculate the IRR, PI and NPV of each of the two-year projects and recommend which project(s) the company should invest in (and why). The company's cost of capital is 12%.