Quiz #5: module 3, chapters 10-12 i2mbaf14 fin 5405 j. houston npv

Quiz #5:  Module 3, Chapters 10-12    I2MBAF14
FIN 5405    J. Houston

NPV sensitivity to WACC
1.    Last month, Harvey Corporation 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.  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:  9.00%    New WACC:  10.50%
Year        0    1    2    3   
Cash flows    -$1,000    $410    $410    $410

Relevant cash flows
2.    Which of the following rules is CORRECT for capital budgeting analysis?

a.    Only incremental cash flows, which are the cash flows that would result if a project is accepted, are relevant when making accept/reject decisions.
b.    The interest paid on funds borrowed to finance a project must be included in estimates of the project’s cash flows.
c.    If a product is competitive with some of the firm’s other products, this fact should be incorporated into the estimate of the relevant cash flows.  However, if the new product is complementary to some of the firm’s other products, this fact need not be reflected in the analysis.
d.    A proposed project’s estimated net income as determined by the firm’s accountants, using generally accepted accounting principles (GAAP), is discounted at the WACC, and if the PV of this income stream exceeds the project’s cost, the project should be accepted.
e.    Sunk costs are not included in the annual cash flows, but they must be deducted from the PV of the project’s other costs when reaching the accept/reject decision.

 WACC calculation
3.    Assume that you are on the financial staff of Chandler Enterprises, and you have collected the following data:  (1) The yield to maturity on the company’s outstanding 8% annual coupon bonds is 6.0%, and its tax rate is 35%.  (2) The risk-free rate is 4%, the market risk premium (rM – rRF) is 6%, and the firm’s beta is 1.1.  (3) The firm’s capital structure consists of 30% debt and 70% equity.  What is Chandler’s WACC?
NPV, constant CFs, NOWC, salvage value
4.    Alfredson Inc. is considering a new investment whose data are shown below.  The required equipment has a 3-year tax life and would be fully depreciated by the straight-line method over the 3 years, but it would have a positive salvage value at the end of Year 3, when the project would be closed down.  Also, some new net operating working capital would be required, but it would be recovered at the end of the project’s life.  Revenues and other operating costs are expected to be constant over the project’s 3-year life.  What is the project’s NPV?

WACC    11%
Net equipment cost (depreciable basis)    $75,000
Required new NOWC    $12,500
Straight line depreciation rate    33.33%
Sales revenues    $110,000
Operating costs excluding depreciation    $45,000
Expected pretax salvage value    $7,500
Tax rate    40%
NPV vs IRR
5.    Tyler Industries 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?  Note that under some conditions choosing projects on the basis of the IRR will cause no value to be lost.  (Note:  A negative answer to this problem indicates that value is added not forgone.)

    WACC = 10%
    Year:    0    1    2    3    4   
    CFS:    -$1,200    $500    $730    $300    $  40
    CFL:    -$1,200    $210    $460    $550    $500

NPV, SL depreciation, constant CFs
6.    Camden Industries is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over the project’s 3-year life, and would have zero salvage value.  No new net operating working capital would be required.  Revenues and other operating costs are expected to be constant over the project’s 3-year life.  What is the project’s NPV?

WACC    11%
Net investment cost (depreciable basis)    $75,000
Straight line depreciation rate    33.33%
Sales revenues    $110,000
Operating costs excluding depreciation    $45,000
Tax rate    40%
MIRR
7.    Jacobs Industries is considering a project that has the following cash flow and WACC data.  What is the project’s MIRR?

WACC = 10%
Year:    0    1    2    3   
Cash flows:    -$2,000    $600    $800    $1,250

Cost of capital concepts
8.    Which of the following statements is CORRECT?

a.    Higher flotation costs tend to reduce the cost of equity capital.
b.    Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity.
c.    The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes.
d.    If a company assigns the same cost of capital to all of its projects regardless of each project’s risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.
e.    Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt.
Crossover rate
9.    Dalrymple Company is considering Projects A and B with the cash flows shown below.  The firm’s WACC is 10%.  There have been discussions within the company about which capital budgeting decision rule should be used to determine the better project.  A staff person has suggested that the crossover rate should be calculated so the firm has more information.  What is the crossover rate for these two projects?  In other words, at what discount rate are the NPVs of these two projects equal?

        0    1    2    3    4    5   
Project A    -$   650    $300    $260    $200    $  50    $100
Project B    -$1,325    $220    $245    $500    $550    $325

Discounted payback
10.    Isaacson Inc. is considering a project that has the following cash flow and WACC data.  What is the project’s discounted payback?

WACC:  8.00%
Year        0    1    2    3    4   
Cash flows    -$950    $525    $485    $445    $405

Order a unique copy of this paper
(550 words)

Approximate price: $22

Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our Guarantees

101papers.com is always working towards customer satisfaction. Our professional academic writers always aim at producing comprehensive papers that possess quality and originality at pocket-friendly prices. Students are assured that all their private information is safe with us.

Money-Back Guarantee

101papers.com provides a system where students can request for money-back in case they cancel the order or in the rare instances of dissatisfaction. The refund policy adheres to the company’s term and conditions on money-back.

Read more

Zero-Plagiarism Guarantee

While providing the best professional essay writing services, we guarantee all our students of plagiarism-free papers. All papers produced by our professional academic writers are checked against all web resources and previously completed papers to avoid plagiarism.

Read more

Free Revision Policy

In our urge to provide the best professional essay writing services, we guarantee students of free revision policy. The free revision policy is a courtesy service where students can request for unlimited for their completed papers. We always aim at achieving 100% customer satisfaction rates. The free revision policy is one among many of our major advantages.

Read more

Privacy Policy

At 101papers.com, every student is entitled to total security. Our professional academic writers are always committed to protecting all private information of our customers. We do not share any personal information with third parties. Additionally, we provide safe systems for all online transactions.

Read more

Fair-Cooperation Guarantee

Working with us is the greatest step towards achieving all your academic goals. We always deliver the best professional essay writing services as promised. We, therefore, expect all students to work cooperatively with us, as we work towards achieving our goal, your satisfaction. This way, all services will be delivered accurately and on time.

Read more

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency