User Account

All Pages

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

Example of debt finance, Example of Debt Finance An example: Intere...

Example of Debt Finance An example: Interest = 10% tax rate = 30% The effective cost of debt (interest) = Interest rate (1 - T) = 10%(1-0.30) = 7% Consider comp

Student, Intercontinental Baseball Manufacturers (IBM) has an outstanding b...

Intercontinental Baseball Manufacturers (IBM) has an outstanding bond with a $1,000 face value that matures in 10 years. The bond, which pays $25 interest every six months ($50 per

Finance, Spot transaction hedge/Money market hedge There are three parts t...

Spot transaction hedge/Money market hedge There are three parts to this question. Please answer all parts. The Chicken Company, a company with headquarters in Switzerland, has a r

Finance final, • Company X has $100,000 face value of outstanding bonds con...

• Company X has $100,000 face value of outstanding bonds consisting of 100 $1,000 face value bonds with a 4% annual coupon and 20 years remaining until maturity. The bonds are cur

Disadvantages of overdraft finance, Disadvantages of Overdraft Finance ...

Disadvantages of Overdraft Finance A. It is expensive as the interest rates of overdrafts are much higher than bank rates. B. The employ of this finance is an indication of

Fiscal federalism, What are the principles of multiunit finance?

What are the principles of multiunit finance?

#toption, expression of underlying asset''s price at maturity T for lookbac...

expression of underlying asset''s price at maturity T for lookback option.

Setting a reorder point - rop, Setting a Reorder Point - ROP  Once the...

Setting a Reorder Point - ROP  Once the order quantity has been determined, the next question to be settled is when to place the order. If an order is released and it takes th

Example of capital asset pricing model, Example of Capital Asset Pricing Mo...

Example of Capital Asset Pricing Model KK Ltd is an all equity firm whose Beta factor is 1.2, the interest rate on T. bills is currently at 8.5% and the market rate of return

Bird-in-hand theory, Bird-in-hand Theory Advanced via John Leitner in ...

Bird-in-hand Theory Advanced via John Leitner in year 1962 and furthered with Myron Gordon in year 1963. Argues such shareholders are risk averse and prefer specific. Dividend

Write Your Message!

Captcha
Order Assignment

Featured Services

Order Now

Popular Subjects

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!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +91-977-207-8620

Phone: +91-977-207-8620

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

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