Answer the following 5 questions related to Finance
1. Given the following cash flows for two mutually exclusive projects (A and B), which project should be chosen?
Assume that the required rate of return of both projects is 11%.
(Hint: Use EAC.)
|
Year\Project
|
A
|
B
|
|
0
|
-$1,000,000
|
-$850,000
|
|
1
|
300,000
|
187,500
|
|
2
|
300,000
|
187,500
|
|
3
|
300,000
|
187,500
|
|
4
|
300,000
|
187,500
|
|
5
|
300,000
|
187,500
|
|
6
|
|
187,500
|
|
7
|
|
187,500
|
|
8
|
|
187,500
|
2. A firm is considering bidding on a project to produce eight widgets per year for the next four years. In order to complete the project, the firm must lease facilities for $30,000 per year, purchase equipment that costs $100,000, as well as pay labour and material costs of $19,000 per unit produced. The equipment can be depreciated at the Class 8 CCA rate of 20%.
At the end of the fourth year, it can be sold for $10,000, and the asset class will remain open after the disposal of the equipment.
In addition, net working capital will increase by $50,000 if the project is undertaken, but these can be recovered at the end of the project. The company's tax rate is 40%.
What is the minimum bid per widget if the firm requires 18% return on its investment?
3. Describe how the inclusion of a strategic option can affect setting a bid price.
4. A firm is considering the purchase of equipment which will cost $3 million. This equipment will last for 10 years, at the end of which it can be sold for $800,000. The CCA rate for this asset class is 30%, and the firm expects to have other assets in this asset class at the end of year 10. This equipment is expected to increase before-tax operating cash flows by $750,000 per year. However, in order to put the equipment to use, an additional $150,000 will need to be invested in net working capital initially (i.e., at t=0). The required rate of return is 16% and the firm's marginal tax rate is 35%.
a. Should the firm purchase this equipment?
b. Suppose that to arrive at the before-tax operating cash flows in part (a), we have used the following estimates:
Fixed costs = $120,000
Variable costs = 60% of sales
What is the Net Present Value of the new equipment if, in the best-case scenario, we estimate that fixed costs could be lower by 20% and sales revenues could be higher by 25%?
c. Given the information in (a), and assuming that fixed costs are $120,000 and variables costs are 60% of sales, what is the sales level at which Net Present Value equals zero? (In other words, what is the financial break-even sales level?)
5. A project has the following estimated data: price = $65 per unit; variable costs = $33 per unit; fixed costs = $4,000; required return = 16%; initial investment = $9,000;
life = three years.
Ignore the effect of taxes and assume straight-line depreciation to zero.
a. What is the accounting break-even quantity?
b. What is the cash break-even quantity?
c. What is the financial break-even quantity?
d. What is the degree of operating leverage at the financial break-even level of output?