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You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time.Both projects have 3-year lives because Allied is planning to introduce entirely new models after 3 years. Allied’s WACC is 10%. You must determine whether one or both of the projects should be accepted. Here are the projects’ cash flows (in thousands ofdollars):0123||||Project L-100106080Project S-1007050201.What is the payback period? Find the paybacks for Projects L and S.2.What is the rationale for the payback method? According to the payback criterion, which project(s) should be accepted if the firm’s maximum acceptable payback is 2 years, if Projects L and S are independent? If Projects L and S are mutually exclusive?3.What is the difference between the regular and discounted payback methods? What is Project L’s discounted payback, assuming a 10% cost of capital?4.Define the term net present value (NPV). What is each project’s NPV?5.What is the rationale behind the NPV method? According to NPV, which project(s) should be accepted if they are independent? Mutually exclusive?6.Define the term internal rate of return (IRR). What is each project’s IRR?7.What is the logic behind the IRR method? According to IRR, which project(s) should be accepted if they are independent? Mutually exclusive?8.TRUE/FALSE: If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV. 9.Draw NPV profiles for Projects L and S. At what discount rate do the profiles cross?10.Look at your NPV profile graph without referring to the actual NPVs and IRRs. Which project(s) should be accepted if they are independent? Mutually exclusive? Explain. Are your answers correct at any WACC less than 23.6%?
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Consider a four-year project with the following information: initial fixed asset investment = $500,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $35; variable costs = $26; fixed costs = $200,000; quantit..
Power Transfer makes large precision gears used in heavy equipment. These are made by drop forging, and they have two identical drop forges. Currently, there are five gears that must he finished by tomorrow morning.
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If the company issued new securities in the same proportion as its target capital structure, what is the company’s target debt–equity ratio?
Your required rate of return on the stock is 10%. What is the most you will pay for a share of this company's stock today?
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