Asset Valuation Models Capital Budgeting Criteria Problem Set Boise State EMBA Byers

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Asset Valuation Models Capital Budgeting Criteria Problem Set Boise State EMBA Byers Remember this is an individual assignment. You should start with a blank spreadsheet.

1 Asset Valuation Models Capital Budgeting Criteria Problem Set Boise State EMBA Byers Remember this is an individual assignment. You should start with a blank spreadsheet. Deliverable: submit your spreadsheet with the problem numbers clearly identified. 1. What is the net present value of a project with the following cash flows and a required return of 11%? 2. Calculate the profitability index (PI) for a project with the following cash flows (to 2 decimal places). 3. Jack is considering adding toys to his general store. He estimates that the cost of inventory will be $4,200. The remodeling expenses and shelving costs are estimated at $300. Toy sales are expected to produce net cash inflows of $1,300, $1,600, $1,700, and $1,750 over the next four years, respectively. What is the project s payback? Should Jack add toys to his store if he assigns a three-year payback period to this project?

2 4. A project has an initial cost of $8,500 and produces cash inflows of $3,000, $4,800, and $1,600 over the next three years, respectively. What is the discounted payback period if the required rate of return is 5%? 5. Martin is analyzing a project and has gathered the following data. Based on this data, what is the average accounting rate of return? The firm depreciates its assets using straight-line depreciation to a zero book value over the life of the asset. 6. Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC (Weighted Average Cost of Capital). The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV? Old WACC: 10.00% New WACC: 11.5% Year Cash flows -$1,000 $410 $410 $410 A. -$18.89 B. -$19.88 C. -$20.93 D. -$22.03 E. -$26.34

3 7. Projects A and B have identical expected lives and identical initial cash outflows (costs). However, most of one project s cash flows come in the early years, while most of the other project s cash flows occur in the later years. The two NPV profiles are given below: NPV ($) A B r (%) Which of the following statements is CORRECT? A. More of Project A s cash flows occur in the later years. B. More of Project B s cash flows occur in the later years. C. We must have information on the cost of capital in order to determine which project has the larger early cash flows. D. The NPV profile graph is inconsistent with the statement made in the problem. E. The crossover rate, i.e., the rate at which Projects A and B have the same NPV, is greater than either project s IRR. 8. Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? WACC: 8.50% Year Cash flows -$850 $300 $320 $340 $360

9. Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable.

25% Year 0 1 2 3 4 CFS -$2,050 $750 $760 $770 $780 CFL -$4,300 $1,500 $1,518 $1,536 $1,554 10.

4 9. Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? WACC: 9.25% Year CFS -$2,050 $750 $760 $770 $780 CFL -$4,300 $1,500 $1,518 $1,536 $1, The Seattle Corporation has been presented with an investment opportunity which will yield end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $80,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's required rate of return is 10 percent. What is the NPV for this investment? 11. Chotchkies Inc. has a project with a 3-year life and a required rate of return of 10 percent. The project s cash flows are: Calculate the project s MIRR. 12. An investment project has an initial cost, and then generates inflows of $50 a year for the next five years. The project has a payback period of 3.4 years. What is the project's internal rate of return?

5 13. As the capital budgeting director for Chapel Hill Coffins Company, you are evaluating construction of a new plant. The plant has a net cost of $5 million in Year 0 (today), and it will provide net cash inflows of $1 million at the end of Year 1, $1.2 million at the end of Year 2, and $2 million at the end of Years 3 through 5. What is the plant's IRR? 14. A project has an initial outlay of $5,500. It has a single payoff of $11,419 at the end of year 7. What is the internal rate of return for the project? 15. A project has a cost of $60,000, and annual cash flows as shown. The discount rate is 10 percent. Calculate NPV for the project. 16. A project has a cost of $60,000, and annual cash flows as shown. The discount rate is 10 percent. Calculate IRR for the project. 17. A project has a cost of $60,000, and annual cash flows as shown. The discount rate is 10 percent. Calculate MIRR for the project.

6 18. A project has a cost of $60,000, and annual cash flows as shown. The discount rate is 10 percent. Calculate PI for the project. 19. A project has a cost of $60,000, and annual cash flows as shown. The discount rate is 10 percent. Calculate Payback for the project. 20. A project has a cost of $60,000, and annual cash flows as shown. The discount rate is 10 percent. Calculate Discounted Payback for the project.

Chapter 8 Net Present Value and Other Investment Criteria Good Decision Criteria

Chapter 8 Net Present Value and Other Investment Criteria Good Decision Criteria We need to ask ourselves the following questions when evaluating decision criteria Does the decision rule adjust for the