Problem 1
A company is evaluating a project with the following projected cash flow characteristics. Calculate the NPV, IRR and Payback period. Assume the company requires a return greater than 9% for this project and a payback period of less than 5 years to undertake it. Based on your findings should the company undertake the project? Explain.
| Year |
Annual Payment |
| 0 |
($75,000) |
| 1 |
$5,000 |
| 2 |
$25,000 |
| 3 |
$25,000 |
| 4 |
$10,000 |
| 5 |
$50,000 |
| 6 |
$40,000 |
Problem 2
"A company is evaluating between two mutually exclusive projects. The estimated cash flows are indicated below. Calculate the NPV and IRR for both projects. The discount rate related to Project A is 12% and the discount rate related to Project B is 16%.
a) Assuming the company is trying to maximize NPV which project should it undertake?
b) Assume the company is trying to maximize the IRR, which project should it undertake?"
| Year |
Project A |
Project A |
| 0 |
($100,000) |
($5,000) |
| 1 |
$0 |
$1,500 |
| 2 |
$0 |
$1,500 |
| 3 |
$0 |
$1,500 |
| 4 |
$0 |
$1,500 |
| 5 |
$0 |
$1,500 |
| 6 |
$250,000 |
$3,000 |
Problem 3
"Below are the relevant financial statement details of a project. Please anwer the subsequent questions.
| |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
| Income Statement: |
|
|
|
|
|
|
| Revenues |
|
$300,000 |
$325,000 |
$350,000 |
$375,000 |
$400,000 |
| Cost of Goods Sold |
|
($180,000) |
($195,000) |
($210,000) |
($225,000) |
($240,000) |
| Gross Profit |
|
$120,000 |
$130,000 |
$140,000 |
$150,000 |
$160,000 |
| SG&A |
|
($30,000) |
($32,500) |
($35,000) |
($37,500) |
($40,000) |
| Depreciation Expense |
|
($50,000) |
($50,000) |
($50,000) |
($50,000) |
($50,000) |
| Operating Income |
|
$40,000 |
$47,500 |
$55,000 |
$62,500 |
$70,000 |
| Taxes |
|
($16,000) |
($19,000) |
($22,000) |
($25,000) |
($28,000) |
| Operating Income |
|
$24,000 |
$28,500 |
$33,000 |
$37,500 |
$42,000 |
| |
|
|
|
|
|
|
| Balance Sheet Items: |
|
|
|
|
|
|
| Investments in equipment |
($250,000) |
$0 |
$0 |
$0 |
$0 |
$0 |
| Investment in working capital |
($25,000) |
($2,500) |
($2,500) |
($2,500) |
($2,500) |
$25,000 |
| Net Balance Sheet Changes |
($275,000) |
($2,500) |
($2,500) |
($2,500) |
($2,500) |
$25,000 |
a. Calculate the projected cash flows.
b. If the company requires a rate of return of at least 12% should it accept this project?
c. "Assume the following scenario:
i) SG&A increases by 20% in each year,
ii) Investment in equipment in Year 0 increases by 50%
Should the company accept the project in this scenario?
Note, the increase in the initial investment in equipment will require a corresponding change in the Depreciation. The equipment is depreciated in a straight-line and has no value remaining at the end of the project."
Attachment:- Problems-Capital Budgeting.xlsx