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

State the determinants of return, State the Determinants of Return T...

State the Determinants of Return Three major determinants of the rate of return expected by investor are: (i) Time preference risk-free real rate. (ii) Expected rate o

Determine the dol for firm, XYZ Ltd. has an average selling price of Rs.10 ...

XYZ Ltd. has an average selling price of Rs.10 per unit. Its variable cost are Rs.7 , and fixed cost amount to Rs.170000. it finances all its assets by equity funds. It pays 35% ta

Different risk-profile - shareholders and management, Different Risk-profil...

Different Risk-profile - Shareholders and Management Shareholders will generally prefer high-risk-high return investments while they are diversified that is they have many inv

Base case NPV., blah blah

blah blah

Underwriting - stock market, Underwriting - Stock Market 1. This is th...

Underwriting - Stock Market 1. This is the supposition of risk relating unsubscribed shares 2. When new shares are issued, they might be beneath -written or unsubscribed. A

Calculate the incremental net present value, The following NPV's have been ...

The following NPV's have been calculated to determine if a compressor installation should be accelerated from Year 3 to Year 7. The compressor cost is $1,500,000.   a. C

Eye field - vertebrate eye, Eye Field - Vertebrate Eye The development...

Eye Field - Vertebrate Eye The development of eyes starts with evagination of the lateral wall of the forebrain. one on each side, which make the optic vesicles. By vital dye

Ros - return on sales-profit margin , ROS - Return on Sales (Profit Margin)...

ROS - Return on Sales (Profit Margin) The Average of the industry ROS was 5.18% for 2004, 4.41% for 2005, and 7.20% for 2006. The chart showed that ROS has been declined f

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

THE CASE OF THE MISSING BONDS RATING, Three of these companies have bonds t...

Three of these companies have bonds that carry investment - grade ratings. The other 3 companies carry junk - bond ratings. Judging by the information in the table, which 3 compani

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