Fin320 Exam 2
Bon Chance, Inc., has an odd dividend policy. The company has just paid a dividend of $7.65 per share and has announced that it will increase the dividend by $10.25 per share for each of the next 4 years, and then never pay another dividend. If you require a return of 16% on the company's stock, how much will you pay for a share today?
$17.90/1.16 + $28.15/1.16^2 + $38.40/1.16^3 + $48.65/1.16^4 = $87.82
Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $3.20 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 13.9% on your equity investments?
$3.2/.139 = $23.02
Kindzi Co. has preferred stock outstanding that is expected to pay an annual dividend of $3.34 every year in perpetuity. If the required return is 3.59%, what is the current stock price?
$3.34/.0359 = $93.04
Voltanis Corp. has preferred stock outstanding that will pay an annual dividend of $3.63 every year in perpetuity. If the stock currently sells for $97.29 per share, what is the required return?
$3.63/$97.29 = .0373 or 3.73%
Michael's Inc., just paid $2.05 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.5%. If you require a rate of return of 8.7%, how much are you willing to pay today to purchase one share of the company's stock?
(2.05 x (1 + .045))/(.087 -.045) = $51.01
A project with an initial cost of $74,500 is expected to generate annual cash flows of $16,800 for the next 8 years. What is the project's internal rate of return?
-$74,500 + $16,800 (PVIFA IRR, 8) = .1536 or 15.36% Use excel sheet
A stock currently sells for $73. The dividend yield is 3.1% and the dividend growth rate is 4.4%. What is the amount of the dividend to be paid in one year?
.031($73) = $2.26
A new project has an initial cost of $165,000. The equipment will be depreciated on a straight-line basis to a zero book value over the five-year life of the project. The projected net income each year is $12,400, $16,300, $18,200, $14,300, and $10,200, respectively. What is the average accounting return?
AAR: (($12,400 +16,300 + 18,200 + 14,300 + 10,200)/5) /(($165,000 + 0)/2))
Mountain Frost is considering a new project with an initial cost of $195,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The projected net income for each year is $19,800, $20,700, $24,600, and $16,700, respectively. What is the average accounting return?
AAR: (($19,800 + 20,700 + 24,600 + 16,700)/4)/(($195,000 + 0)/2) = .2097 or 20.97%
The Bruin's Den Outdoor Gear is considering a new 7-year project to produce a new tent line. The equipment necessary would cost $1.63 million and be depreciated using straight-line depreciation to a book value of zero. At the end of the project, the equipment can be sold for 15% of its initial cost. The company believes that it can sell 26,500 tents per year at a price of $70 and variable costs of $30 per tent. The fixed costs will be $455,000 per year. The project will require an initial investment in net working capital of $217,000 that will be recovered at the end of the project. The required rate of return is 11.3% and the tax rate is 35%. What is the NPV?
Aftertax salvage value: ($1,630,000 x .15)(1 - .35) = $158,925 OCF: (26,500($70-30) - 455,000)(1 - .35) + .35($1,630,000/7) = $474,750 NPV: -$1,630,000 - 217,000 + 474,750(PVIFA 11.3%, 7) + (158,925 + 217,000)/1.113^7 =$546,2750
Guerilla Radio Broadcasting has a project available with the following cash flows: Year 0 = -$12,400, Year 1 = 5,100, Year 2 = 6,400, Year 3 = 5,800, Year 4 = 4,200. What is the payback period?
Amount short after 2 years: $12,400-5,100-6,400 = $900 Payback Period: 2 + $900/$5,800 = 2.16 years
There is a project with the following cash flows: Year 0 = -$24,700, Year 1 = 7,400, Year 2 = 7,900, Year 3 = 7,300, Year 4 = 5,500 What is the payback period?
Amount short after 3 years: $24,700 - 7,400 - 7,900 - 7,300 = $2,100 Payback period: 3 + $2,100/$5,500 = 3.38 years
Consider an asset that costs $645,000 and is depreciated straight-line to zero over its 8-year tax life. The asset is to be used in a 6-year project, at the end of the project, the asset can be sold for $117,000. What is the book value of the equipment at the end of 6 years? If the relevant tax rate is 22%, what is the aftertax cash flow from the sale of this asset?
Annual depreciation: $645,000/8 = $80,625 Accumulated depreciation: 6($80,625) = $483,750 BV6: $645,000 - 483,750 = $161,250 Aftertax salvage value: $117,000 + ($161,250 - $117,000)(.22) = $126,735
Kolby's Korndogs is looking at a new sausage system with an installed cost of $670,000. This cost will be depreciated straight-line to zero over the project's 5-year life, at the end of which the sausage system can be scrapped for $88,000. The sausage system will save the firm $213,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $41,000. What is the aftertax salvage value of the equipment? What is the annual operating cash flow? If the tax rate is 23% and the discount rate is 11%, what is the NPV of this project?
Annual depreciation: $670,000/5 = $134,000 Aftertax salvage value: $88,000(1 - .23) = $67,760 OCF: $213,000(1 - .23) + .23($134,000) = $194,830 NPV: -$670,000 - $41,000 - $194,830(PVIFA 11%, 5) + (($67,760 + $41,000)/1.11^5) = $73,615.38
You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $21 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,935,000, $2,205,000, $2,154,000, and $1,386,000 over these four years, what is the project's average accounting return (AAR)?
Average Net Income: ($1,935,000 + 2,205,000 + 2,154,000 + 1,386,000)/4 = $1,920,000 Average Book Value: ($21,000,000 + 0)/2 = $10,500,000 AAR: $1,920,000/$10,500,000 = .1829 or 18.29%
A 4-year project has an annual operating cash flow of $58,000. At the beginning of the project, $4,900 in net working capital was required, which will be recovered at the end of the project. The firm also spent $23,700 on equipment to start the project. This equipment will have a book value of $5,180 at the end of the project, but can be sold for $6,060. The tax rate is 35%. What is the Year 4 cash flow?
Cash Flow: $58,000 + 4,900 + 6060 + .35($5,180 - 6,060) = $68,652
Crenshaw Enterprises has gathered projected cash flows for two projects. Project 1: Year 0 = -$252,000, Year 1 = 114,800, Year 2 = 103,400, Year 3 = 87,400, Year 4 = 76,400 Project 2: Year 0 = -$252,000, Year 1 = 86,200, Year 2 = 99,200, Year 3 = 101,200, Year 4 = 108,200 a. At what interest rate would the company be indifferent between the two projects? b.Which project is better if the required return is above this interest rate?
Cash flow 0 = 0 Cash flow 1 = $28,600 Cash flow 2 = $4,200 Cash flow 3 = -$13,800 Cash flow 4 = -$31,800 Press CPT IRR = 13.72%
A stock currently sells for $42. The dividend yield is 3.1% and the dividend growth rate is 4.4%. What is the amount of the dividend that was just paid?
D1: .031($42) = $1.30 D0: $1.30/(1 + .044) = $1.25
CDB stock is currently priced at $74. The company will pay a dividend of $4.33 next year and investors require a return of 10.5% on similar stocks. What is the dividend growth rate on this stock?
Dividend Yield: $4.33/$74 = 5.85% Dividend Growth: !0.50% - 5.85% = 4.65%
A stock just paid a dividend of $5.69 and is expected to maintain a constant dividend growth rate of 4.2% indefinitely. If the current stock price is $85, what is the required return on the stock?
Dividend Yield: ($5.69(1+.042)/$85 = .0698 or 6.98% Required Return: 4.2% + 6.98% = 11.18%
Shares of common stock of the Samson Co. offer an expected total return of 13.20%. The dividend is increasing at a constant 5.70% per year. The dividend yield must be:
Dividend Yield: 13.20% - 5.70% = 7.50%
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $890 per set and have a variable cost of $427 per set. The company has spent $190,000 for a marketing study that determined the company will sell 79,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,550 sets per year of its high-priced clubs. The high-priced clubs sell at $1,320 and have variable costs of $640. The company will also increase sales of its cheap clubs by 10,700 sets per year. The cheap clubs sell for $336 and have variable costs of $138 per set. The fixed costs each year will be $14,250,000. The company has also spent $1,400,000 on research and development for the new clubs. The plant and equipment required will cost $42,600,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $3,575,000 that will be returned at the end of the project. The tax rate is 24%, and the cost of capital is 14%. What is the Time 0 cash flow?
Initial cost: $42,600,000 + 3,575,000 = $46,175,000 Sales: New clubs: $890 x 79,000 = $70,310,000 Exp. clubs: $1,320 x (-8,550) = $11,286,000 Cheap clubs: $336 x 10,700 = $3,595,200 Total sales = $62,619,200 Variable costs: New clubs: $427 x 79,000 = $33,733,000 Exp. clubs: $640 x (-8,550) = -5,472,000 Cheap clubs: $138 x 10,700 = 1,476,600 Total variable costs: $29,737,600 Sales: $ 62,619,200 Variable cost: 29,717,600 Costs: 14,250,000 Depreciation: 6,085,714 EBIT = $12,545,886 Taxes: 3,011,013 Net Income = $9,534,873 OCF: $15,9,534,873 + 6,085,714 = $15,620,587 Payback Period: 2 + $14,933,825/$15,620,587 = 2.96 years NPV: -$46,175,000 + $15,620,587(PVIFA 14%, 7) + $3,575,000/1.14^7 = $22,239,544.09 IRR: 28.30%
For the given cash flows, suppose the firm uses the NPV decision rule. Year 0 = -$161,000, Year 1 = 55,000, Year 2 = 84,000, Year 3 = 68,000 a. At a required return of 9%, what is the NPV of the project? b. At a required return of 21%, what is the NPV of the project?
NPV: -$161,000 + $55,000/1.09 + $84,000/1.09^2 + $68,000/1.09^3 = $12,668.31 NPV: -$161,000 + $55,000/1.21 + $84,000/1.21^2 + $68,000/1.21^3 = -$19,788.10
Blink of an Eye Company is evaluating a 5-year project that will provide cash flows of $38,100, $74,310, $62,930, $60,920, and $44,080, respectively. The project has an inital cost of $174,400 and the required return is 8.9%. What is the project's NPV?
NPV: -$174,400 + $38,100/(1 + .089) + $74,310/(1 +.089)^2 + $62,930/(1 +.089)^3 + $60,920/(1 + .089)^4 + $44,080/(1 + .089)^5 = $44,070.64
Living Colour Co. has a project available with the following cash flows: Year 0 = -$34,750, Year 1 = 8,030, Year 2 = 9,650, Year 3 = 13,700, Year 4 = 15,690, Year 5 = 10,460 If the required return for the project is 8.1%, what is the project's NPV?
NPV: -$34,750 + $8,030/(1 + .081) + $9,650/(1 + .081)^2 + $13,700/(1 + .081)^3 + $15,690/(1 + .081)^4 + $10,460/(1 + .081)^5 = $10,357.71
Bruno's Lunch Counter is expanding and expects operating cash flows of $29,300 a year for 6 years as a result. This expansion requires $96,300 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $7,200 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 11%?
NPV: -$96,300 - 7,200 + 29,300(PVIFA 11%, 6) + 7,200/1.11^6 = $24,304
A project will reduce costs by $36,400 but increase depreciation by $16,900. What is the operating cash flow if the tax rate is 34%?
OCF: $36,400(1 - .34) + .34($16,900) = $29,770
You have calculated the pro forma net income for a new project to be $45,930. The incremental taxes are $22,260 and incremental depreciation is $16,320. What is the operating cash flow?
OCF: $45,930 + 16,320 = $62,250
Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $10,100 per year and will cut annual operating costs by $13,600. The system will cost $53,800 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 40% and the required return is 11.1%. What is the NPV of purchasing the pressure cooker?
OCF: ($10,100 + 13,600)(1 - .40) + .40($53,800/5) = $18,524 NPV: -$53,800 + 18,524 (PVIFA 11.1%, 5) = $14,491
Bennett Co. has a potential new project that is expected to generate annual revenues of $254,000, with variable costs of $140,400, and fixed costs of $58,600. To finance the new project, the company will need to issue new debt that will have an annual interest expense of $20,000. The annual depreciation is $23,400 and the tax rate is 34%. What is the annual operating cash flow?
OCF: ($254,000 - 140,400 - 58,600)(1 - .34) + .34($23,400) = $44,256
A project is expected to generate annual revenues of $126,500, with variable costs of $78,100, and fixed costs of $18,600. The annual depreciation is $4,400 and the tax rate is 34%. What is the annual operating cash flow?
OCF: (126,500 - 78,100 - 18,600)(1 - .34) + .34($4,400) = $21,164
Go Fly A Kite is considering making and selling custom kites in two sizes. The small kites would be priced at $12.30 and the large kites would be $25.30. The variable cost per unit is $5.95 and $12.90, receptively. Jill, the owner, feels that she can sell 3,500 of the small kites and 1,970 of the large kites each year. The fixed costs would be $2,120 a year and the depreciation expense is $1,800. The tax rate is 34%. What is the annual operating cash flow?
OCF: (3,500($12.30 - 5.95) + 1,970($25.30 - 12.90) - 2,120)(1 - .34) + .34($1,800) = $30,004
Burke's Corner currently sells blue jeans and T-shirts. Management is considering adding fleece tops to its inventory to provide a cooler weather option. The tops would sell for $52 each with expected sales of 3,750 tops annually. By adding the fleece tops, management feels the firm will sell an additional 230 pairs of jeans at $62 a pair and 365 fewer T-shirts at $23 each. The variable cost per unit is $30 on the jeans, $14 on the T-shirts, and $26 on the fleece tops. With the new item, the depreciation expense is $32,000 a year and the fixed costs are $67,000 annually. The tax rate is 40%. What is the project's operating cash flow?
OCF: (3,750($52 - 26) + 230($62-30) - 365($23 -14) - 67,000)(1 - .40) + .40($32,000) = $33,545
You own a house that you rent for $1,700 per month. The maintenance expenses on the house average $320 per month. The house cost $243,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $265,000. If you sell the house you will incur $21,200 in real estate fees. The annual property taxes are $3,700. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?
Opportunity Cost: $265,000 - 21,200 = $243,800
Weisbro and Sons common stock sells for $24 a share and pays an annual dividend that increases by 4.9% annually. The market rate of return on this stock is 10.6%. What is the amount of the last dividend paid by Weisbro and Sons?
P0 = $24 = (D0 x (1 + .049))/(.1060 - .049) D0 = $1.30
Cape Corp. will pay a dividend of $3.10 next year. The comapny has stated that it will maintain a constant growth rate of 4.75% a year forever. If you want a return of 16%, how much will you pay for the stock? If you want a return of 10%, how much will you pay for the stock?
P0 = $3.10/(.16 - .0475) P0 = $27.56 P0 = $3.10/(.10 - .0475) P0 = $59.05
Symon's Suppers Co. has announced that it will pay a dividend of $4.27 per share one year from today. Additionally, the company expects to increase its dividend by 4.6% annually. The required return on the company's stock is 10.8%. What is the current share price?
P0 = $4.27/(.108 - .046) = $68.87
You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 4.6% indefinitely. The company just paid a dividend of $3.41 and you feel that the required return on the stock is 11%. What is the price per share of the company's stock?
P0 = ($3.41 x (1 + .046))/(.110 - .046) = $55.73
Poulter Corporation will pay a dividend of $4.70 per share next year. The company pledges to increase its dividend by 7.26% per year, indefinitely. If you require a return of 10% on your investment, how much will you pay for the company's stock today?
P0: $4.70/(.10-.0725) = $170.91
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 10 years because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $14.75 per share 11 years from today and will increase the dividend by 5.25% per year thereafter. The required return on the stock is 13.25%. What is the price of the stock 10 years from today? What is the current share price?
P10: $14.75/(.1325 - .0525) = $184.38 P0: $184.38/1.1325^10 = $53.1300
E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 11.75% on the stock, how much should you pay today?
P19 = $20/.1175 = $170.21 P0 = $170.21/1.1175^19 = $20.62
Synovec Corporation is expected to pay the following dividends over the next 4 years: $6.30, $17.30, $22.30, $4.10. Afterward, the company pledges to maintain a constant 5.75% growth rate in dividends forever. If the required return on the stock is 8%, what is the current share price?
P4: $4.10(1.0575)/(.08 - .0575) = $192.70 P0: $6.30/1.08 + $17.30/1.08^2 + $22.30/1.08^3 + $4.10/1.08^4 + $192.70/1.08^4 = $183.02
NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.39 a share. The following dividends will be $.44, $.59, and $.89 a share annually for the following 3 years, respectively. After that, dividends are projected to increase by 2.9% per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 10%?
P4= ($.89 x 1.029)/(.10-.029) = $12.90 P0= $.39/1.10 + $.44/1.10^2 + $.59/1.10^3 + $.89/1.10^4 + $12.90/1.10^4 = $10.58
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 19% a year for the next 4 years and then decreasing the growth rate to 4% per year. The company just paid its annual dividend in the amount of $1.90 per share. What is the current value of one share of this stock if the required rate of return is 7.40%?
P4= ($1.90 x 1.19^4 x 1.04)/(.074 - .04) = $116.55 P0= ($1.90 x 1.19)/1.074 + ($1.90 x 1.19^2)/1.074^2 + ($1.90 x 1.19^3)/1.074^3 + ($1.90 x 1.19^4)/1.074^4 + $116.55/1.074^4 = $97.48
Asonia Co. will pay a dividend of $4.10, $8.20, $11.05, and $12.80 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 9.3% on the company's stock, what is the stock price?
P: $4.10/(1 +.093) + $8.20/(1 +.093)^2 + $11.05/(1 + .093)^3 + $12.80/(1 + .093)^4 = $28.05
Knightmare, Inc, will pay a dividend of $4.95, $9.05, and $12.25 per share for each of the next three years, respectively. The company will then close its doors. Investors require a return of 10% on the company's stock. What is the current stock price?
P: $4.95/(1 + .100) + $9.05/(1 + .100)^2 + $12.25/(1 + .100)^3 = $21.18
POD has a project with the following cash flows: Year 0 = -$243,000, Year 1 = 147,400, Year 2 = 164,900, Year 3 = 130,000 The required return is 8.7%. What is the profitability index for this project?
PI: ($147,400/(1 + .087) + $164,900/(1 + .087)^2 + $130,000/(1 + .087)^3)/$243,000 = 1.549
A project has the following cash flows: Year 0 = -$127,000, Year 1 = 45,800, Year 2 = 62,900, Year 3 = 51,300, Year 4 = 27,600 The required return is 8.1%. What is the profitability index for this project?
PI: ($45,800/(1 + .081) + $62,900/(1 + .081)^2 + $51,300/(1 +.081)^3 + $27,600/(1 + .081)^4)/$127,500 = 1.232
A project with an initial cost of $29,800 is expected to provide cash flows of $9,600, $10,900, $14,000, and $8,500 over the next four years, respectively. If the required return is 8.3%, what is the project's profitability index?
PI: ($9,600/(1 + .083) + $10,900/(1 + .083)^2 + $14,000/(1 + .083)^3 + $8,500/(1 + .083)^4)/$29,800 = 1.187
Burkhardt Corp. pays a constant $14.80 dividend on its stock. The company will maintain this dividend for the next 7 years and will then cease paying dividends forever. If the required return on this stock is 12%, what is the current share price?
PMT: $14.80 N: 7 I/YR: 12% = $67.54
Red Bud Co. pays a constant dividend of $2.30 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7.9%?
PMT: 2.3 N: 2 I/YR: 7.9 = $4.11 or P0: $1.90/1.075 + $1.90/1.075^2 = $3.41
A project with an initial investment of $442,100 will generate equal annual cash flows over its 8-year life. The project has a required return of 8.3%. What is the minimum annual cash flow required to accept the project?
PV = $442,100 N = 8 I/YR = 8.3 PMT = 77,810.01
A project that costs $24,000 today will generate cash flows of $7,900 per year for seven years. What is the project's payback period?
Payback period: $24,000/$7,900 = 3.04 years
E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. The required return on the stock is 8.75%. What is the price of the stock 19 years today? What is the price of the stock today?
Price in 19 years: P19 = $20/.0875 = $228.57 Price today: $228.57/1.0875^19 = $46.44
Smiling Elephant, Inc., has an issue of preferred stock outstanding that pays a $5.70 dividend every year, in perpetuity. If this issue currently sells for $80.45 per share, what is the required return?
R = $5.70/$80.45 R = .0709 or 7.09%
The next dividend payment by Hoffman, Inc., will be $3.40 a share. The dividends are anticipated to maintain a growth rate of 2.25% forever. If the stock currently sells for $50.40 per share, what is the required return?
R: ($3.40/$50.40) + .0225 = .0900 or 9.00%
Redan Inc., is expected to maintain a constant 5.45% growth rate in its dividends, indefinitely. If the company has a dividend yield of 3.95%, what is the required return on the company's stock?
R: .0395 + .0545 = .0940 or 9.40%
A stock is expected to maintain a constant dividend growth rate of 4.6% indefinitely. If the stock has a dividend yield of 5.9%, what is the required return on the stock?
Required Return: 4.6% + 5.9% = 10.5%
Matterhorn Mountain Gear is evaluating two projects with the following cash flows: Project X: Year 0 = $318,000, Year 1 = 146,800, Year 2 = 164,300, Year 3 = 129,400 Project Y: Year 0 = $296,600, Year 1 = 137,650, Year 2 = 154,850, Year 3 = 120,600 What interest rate will make the NPV for the projects equal?
Take differences of each year and input as the cash flows on excel sheet IRR = 13.54%
Shelton Co. purchased a parcel of land six years ago for $860,500. At that time, the firm invested $132,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time. It decided to lease the land for $47,500 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $912,000. What value should be included in the initial cost of the warehouse project for the use of the land?
The opportunity cost of the building is what it could be sold for today or, $912,000
Blinding Light Co. has a project available with the following cash flows: Year 0 = -$32,350, Year 1 = 8,480, Year 2 = 10,250, Year 3 = 14,750, Year 4 = 16,290, Year 5 = 11,360. What is the project's IRR?
Use Excel sheet
You are considering the following two mutually exclusive projects. The crossover rate between these two projects is ________ percent and Project _______ should be accepted if the required return is greater than the crossover rate. Project A: Year 0 = $32,000, Year 1 = 12,500, Year 2 = 12,500, Year 3 = 20,500 Project B: Year 0 = $32,000, Year 1 = 20,650, Year 2 = 10,500, Year 3 = 12,670
Use IRR Excel sheet IRR = .1105 or 11.05% Project B because it has larger cash flows early, it will have the greater NPV at higher interest rates.
You are evaluating two projects with the following cash flows: Project X: Year 0 = -$540,000, Year 1 = 219,800, Year 2 = 229,700, Year 3 = 236,000, Year 4 = 196,600 Project Y: Year 0 = -$510,500, Year 1 = 209,000, Year 2 = 219,300, Year 3 = 227,200, Year 4 = 188,000 What is the crossover rate for these two projects?
Use difference of cash flows in IRR excel sheet IRR = 12.59%
Gateway Communications is considering a project with an initial fixed assets cost of $1.74 million that will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $232,000. The project will not change sales but will reduce operating costs by $383,500 per year. The tax rate is 35% and the required return is 10.7%. The project will require $48,000 in net working capital, which will be recouped when the project ends. What is the project's NPV?
Year 0 CF = -$1,740,000 - 48,000 = -$1,788,000 OCF: $383,500(1 - .35) + .35($1,740,000/10) = $310,175 Year 10 CF: $48,000 + 232,000(1 - .35) = $198,800 NPV: -$1,788,000 + 310,175(PVIFA 10.7%, 10) + 198,800/1.07^10 =$133,836
Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $73,000 per year for 9 years. At the beginning of the project, inventory will decrease by $33,600, accounts receivable will increase by $29,800, and accounts payable will increase by $21,600. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $315,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating an aftertax cash flow of $92,000. What is the net present value of this project given a required return of 12.2%?
Year 0 CF: -$315,000 + 33,600 + 29,800 + 21,600 = -$289,600 Year 9 CF: -$92,000 - 33,600 + 29,800 - 21,600 = $66,600 NPV: -$289,600 + 73,000(PVIFA 12.2%,9) + 66,600/1.122^9 = $120,057
Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 31% for the next 3 years, with the growth rate falling off to a constant 7.6% thereafter. The required return is 12% and the company just paid a dividend of $1.75. What are the dividends each year for the next 4 years?
Year 1: 2.29 (1.75 x 31% = .5425 + 1.75 = 2.29) Year 2: 3.00 (2.29 x 31% = .7099 + 2.29 = 3 (2.9999)) Year 3: 3.93 (3 x 31% = .93 + 3 = 3.93) Year 4: 4.23 (3.93 x 7.6% = .29868 + 3.93 = 4.23 (4.22868))
Piercy, LLC, has identified the following two mutually exclusive projects. A: Year 0 = -$55,000, Year 1 = 31,000, Year 2 = 25,000, Year 3 = 18,500, Year 4 = 13,000 B: Year 0 = -$55,000, Year 1 = 18,500, Year 2 = 22,500, Year 3 = 27,000, Year 4 = 25,500 a-1. What is the IRR for each of these projects? a-2. If you apply the IRR decision rule, which project should the company accept? b-1. Assume the required return is 11%. What is the NPV for each of these projects? b-2. Which project will you choose if you apply the NPV decision rule? c-1. Over what range of discount rates would you choose Project A? c-2. Over what range of discount rates would you choose Project B?
a-1. Use spreadsheet (A = 25.71% and B = 23.53%) a-2. Accept Project A b-1. A: NPV: -$55,000 + $31,000/1.11 + $25,000/1.11^2 + $18,500/1.11^3 + $13,000/1.11^4 = $15,309.03 B: NPV: -$55,000 + $18,500/1.11 + $22,500/1.11^2 + $27,000/1.11^3 + $25,500/1.11^4 = $16,467.98 b-2. Accept Project B c-1. Use IRR spreadsheet and put difference in cash flows (A-B) in as the cash flows. Above 14.91% c-2. Below 14.91%
The Whenworth Corporation is trying to choose between the following two mutually exclusive design projects. Cash Flow 1: Year 0 = -$79,000, Year 1 = 30,500, Year 2 = 39,000, Year 3 = 45,000 Cash Flow 2: Year 0 = -$37,000, Year 1 = 12,500, Year 2 = 26,500, Year 3 = 20,500 a-1. If the required return is 13%, what is the profitability index for each project? a-2. If the company applies the profitability index decision rule, which project should it take? b-1. If the required return is 13%, what is the NPV for each project? b-2. If the company applies the net present value decision rule, which project should it take?
a-1: PI1 = ($30,500/1.13 + $39,000/1.13^2 + $45,000/1.13^3)/$79,000 = 1.123 PI2 = ($12,500/1.13 + $26,500/1.13^2 + $20,500/1.13^3)/$37,000 = 1.244 a-2: accept PI2 because it's greater than PI1 b-1: NPV1 = -$79,000 +$30,500/1.13 + $39,000/1.13^2 + $45,000/1.13^3 = $9,721.13 NPV2: -$37,000 + $12,500/1.13 + $26,500/1.13^2 + $20,500/1.13^3 = $9,022.86 b-2: accept Project 1 since the NPV is greater OR SEE CALCULATOR SOLUTION
Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 13%. Project F: Year 0 = $127,000, Year 1 = 64,000, Year 2 = 46,000, Year 3 = 56,000, Year 4 = 51,000, Year 5 = 46,000 Project G: Year 0 = $197,000, Year 1 = 44,000, Year 2 = 59,000, Year 3 = 86,000, Year 4 = 116,000, Year 5 = 131,000 a. Calculate the payback period for both projects. b. Calculate the NPV for both projects. c. Which project, if any, should the company accept?
a. F: Payback: 2 + ($17,000/$56,000) = 2.30 years G: Payback: 3 + ($8,000/$116,000) = 3.07 b. F: NPV: -$127,000 + $64,000/1.13 + $46,000/1.13^2 + $56,000/1.13^3 + $51,000/1.13^4 + $46,000/1.13^5 = $60,718.94 G: NPV: -$197,000 + $44,000/1.13 + $59,000/1.13^2 + $86,000/1.13^3 + $116,000/1.13^4 + $131,000/1.13^5 = $89,992.55 c. Project G
Coore Manufacturing has the following two possible projects. The required return is 12%. Project Y: Year 0 = -$28,500, Year 1 = 14,500, Year 2 = 12,900, Year 3 = 15,300, Year 4 = 10,900 Project Z: Year 0 = -$50,000, Year 1 = 14,500, Year 2 = 36,000, Year 3 = 12,500, Year 4 = 34,000 a. What is the profitability index for each project? b. What is the NPV for each project? c. Which, if either, of the projects should the company accept?
a. Y: PI: ($14,500/1.12 + $12,900/1.12^2 + $15,300/1.12^3 + $10,900/1.12^4)/$28,500 = 1.440 Z: PI: ($14,500/1.12 + $36,000/1.12^2 + $12,500/1.12^3 + $34,000/1.12^4)/$50,000 = 1.443 or see calculator solution b. Y: NPV: -$28,500 + $14,500/1.12 + $12,900/1.12^2 + $15,300/1.12^3 + $10,900/1.12^4 = $12.547.61 Z: NPV: -$50,000 + $14,500/1.12 + $36,000/1.12^2 + $12,500/1.12^3 + $34,000/1.12^4 = $22,150.28 c. Accept Project Z since the NPV is higher
The stock price of Alps Co. is $54.00. Investors require a return of 14% on similar stocks. If the company plans to pay a dividend of $3.65 next year, what growth rate is expected for the company's stock price?
g: 14 - ($3.65/$54.00) = .0724 or 7.24%
