homework, Finance Basics

Assignment Help:
the two problems below (P1 and P2). Five marks each. Part marks will be allocated, but if you have the incorrect answer then you cannot expect to get more than half marks.

Project 1 (P1)

Polycorp is considering an investment in new plant of $2.95 million. The project will be financed with a loan of $1,500,000 which will be repaid over the next five years in equal annual end of year instalments at a rate of 7.15 percent pa. Assume diminishing value depreciation over a five-year life, and no taxes. The projects cash flows before loan repayments and interest are shown in the table below. Cost of capital is 10.80% pa (the required rate of return on the project). A salvage value of $265,000 is expected at the end of year five and is included in the cash flows for year five below. Ignore taxes and inflation.

Year Year One Year Two Year Three Year Four Year Five
Cash Inflow 1,080,000 820,000 805,000 1,005,000 1,045,000

You are required to calculate:
(1) The amount of the annual loan repayment and produce a repayment schedule.
(2) NPV of the project (to the nearest dollar)
(3) IRR of the project (as a percentage to two decimal places)
(4) AE, the annual equivalent for the project(AE or EAV) (to the nearest dollar)
(5) PB, the payback and discounted payback in years (to one decimal place)
(6) ARR, the accounting rate of return (gross and net) (to two decimal places)
(7) PI (present value index or profitability index) (to two decimal places)
(8) Is the project acceptable? You must provide a decision or explanation for each of the methods in parts (2) to (7). Why or why not (provide a full explanation)? Also a brief explanation of your treatment of Salvage Value and Loan Repayments is required.


Project 2 (P2)

Polycorp Limited Steel Division is considering a proposal to purchase a new machine to manufacture a new product for a potential three year contract. The new machine will cost $1.6 million. The machine has an estimated life of three years for accounting and taxation purposes. The contract will not continue beyond three years and the equipment’s estimated salvage value at the end of three years is $198,000. The tax rate is 27 percent and is payable in the year after which profit is earned. An investment allowance of twenty percent on the outlay is available. The after tax cost of capital is 12.85%pa. Additional current assets of $65,000 are required immediately for working capital to support the project. Assume that this amount is recovered in full at the end of the three year life of the project. The new product will be charged $149,500 of allocated head office administration costs each year even though head office will not actually incur any extra costs to manage the project. This is in accordance with the firm’s policy of allocating all corporate overhead costs to divisions. Extra marketing and administration cash outflows of $151,000 per year will be incurred by the Steel Division for the project. An amount of $149,000 has been spent on a pilot study and market research for the new product. The projections provided here are based on this work. Projected sales for the new product are 31,000 units at $152 per unit per year. Cash operating expenses are estimated to be 71 percent of sales (excludes marketing and administration, and head office items). Except for initial outlays, assume cash flows occur at the end of each year (unless otherwise stated). Assume diminishing value depreciation for tax purposes.

Required
(a) Construct a table showing your calculations of net cash flow after tax (NCFAT). Use the method shown in lectures and notes.
(b) Calculate the NPV. Is the project acceptable? Why or why not?
(c) Conduct a sensitivity analysis showing how sensitive the project is to operating expenses and to the cost of capital. Explain.
(d) Write a short report explaining your calculation of relevant net cash flows after tax, justifying your selection of cash flows. Be sure to state clearly any assumptions made (implicit and explicit).


Related Discussions:- homework

Acceptance rule of payback period or pbp, Acceptance Rule of Payback Period...

Acceptance Rule of Payback Period or PBP By using PBP method a company such will accept all those ventures whose payback period is less than to set via the management and will

Calculate the monthly payment - annual percentage rate, You have just taken...

You have just taken out a $220,000 loan for your house at an APR of 7.5% and a 30-year term. Payments are to be made monthly . Two years from now, you refinance at an APR of 5.5%

Project apparisal, challenges your likely to face when apparising a project...

challenges your likely to face when apparising a project on the implemtation stage

Cash budgeting, what is cash budgeting and what is it used for

what is cash budgeting and what is it used for

Limitations of credit cards - source of finance, Limitations of Credit Card...

Limitations of Credit Cards - Source of Finance Limitations of Credit Cards as a Source of Finance are as follow: i) These cards lead to overspending on the part of the hol

Calculate the beta which measure risk, Stone Container is a major producer ...

Stone Container is a major producer of cardboard boxes. Stone Container has $10M in outstanding equity. In addition, it has $2M in outstanding debt. The debt is a ten-yearmortgage

Find the required return, Marbela Corporation's stock had a required return...

Marbela Corporation's stock had a required return of 12.75% last year, when the risk-free rate was 6.4% and the market risk premium was 5.5%.  Now suppose the market risk premium d

Describe the role of insurance companies, Describe the role of insurance co...

Describe the role of insurance companies. Role of Insurance Companies: The main objective of insurance companies is to prevent individuals and firms (termed as policy-hol

Political and technological factor - investment decisions, Political Factor...

Political Factors and Technological Factors - Investment Decisions i) Political factors - Under conditions of political uncertainty, that decisions cannot be completed as it

Calculate the total increment prize, Prudence buys a bond in EUR when it is...

Prudence buys a bond in EUR when it issued by the French government and inflation linked.  It offers a 2% yearly coupon.  She holds it for five years.             Par value: EUR

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd