Supplier of auto repair parts used in the after-market

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Reference no: EM132068566

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%?

Reference no: EM132068566

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