FIN 370 week 3 lab new (Promotion Work)

1 (Net present value calculation) Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an intial outlay of $110,000 and will generate net cash inflows of $19,000 per year for 9years.

a. What is the project's NPV using a discount rate of 11%? Should the project be accepted? Why or why not?

b. What is the project's NPV using a discount rate of 14%? Should the project be accepted? Why or why not?

c. What is this project's internal rate of return? Should the project be accepted? Why or why not?

2 (IRR calculation) what is the internal rate of return for the following project. An initial outlay of $11,500 resulting in a single cash inflow of $26,814 in 11 years.

The internal rate of return for the following project is .........

3 (NPV and IRR calculation) East Coast Television is considering a project with an initial outlay of $X (you will have to determine this amount). It is expected that the project will produce a positive cash flow of $41,000 a year at the end of each year for the next 16 years. The appropriate discount rate for this project is 11 percent. If the project has a 14 percent internal rate of return, what is the project’s net present value?

4 (IRR and NPV calculation) The cash flows for three independent projects are found below:

a. calculate the IRR for each of the projects.

b. If the discount rate for all the three projects is 16%, which project or projects would you want to undertake?

c. What is the net present value of each of the projects where the appropriate discount rate is 16%?

5 (IRR of an uneven cash flow stream) Microwave Oven Programming, Inc. is considering the construction of a new plant. The plant will have an initial cash outlay of $7.7 million (CF0 = –$7.7 million), and will produce cash flows of $2.7 million at the end of year 1, $5.2million at the end of year 2, and $2 million at the end of years 3 through 5. What is the internal rate of return on this new plant?

6 (NPV, PI, and IRR calculations)

Fijisawa, Inc., is considering a major expansion of its product line and has estimated the following free cash flows associated with such an expansion. The initial outlay associated with the expansion would be $2,050,000, and the project would generate free cash flows of $460,000 per year for six years. The appropriate required rate of return is 7.9 percent.

a. Calculate the net present value.

b. Calculate the profitability index.

c. Calculate the internal rate of return.

d. Should this project be accepted?

7 (Payback period, net present value, profitability index, and internal rate of return

calculations) you are considering a project with an initial cash outlay of $82,000 and expected free cash flow of $22,960 at the end of each year for 6 years The discount rate for this project is 9.8%.

a. what is the project's payback period and discounted payback periods?

b. what is the project's NPV?

c. what is the project's PI?

what is the project's IRR?

8 (Calculating operating cash flows) Assume that a new project will annually generate revenues of $1,800,000 and cash expenses, including both fixed and variable cost of $1, 200,000, while increasing depreciation by $160,000 per year. In addition, let’s assume that the firm's marginal tax rate is 29 percent. Calculate the operating cash flows for the new project.

9 (Calculating free cash flow) You are considering expanding your product line that currently consists of skateboards to include gas-powered skateboards, and you feel

you can sell 7,000 of these per year for 10 years (after which time this project is expected to shut down with solar-powered

skateboards taking over). The gas skateboards would sell for $90 each with variable costs of $50 for each one produced, while annual fixed costs associated with production $190,000. In addition, there would be a $1,100,000 initial expenditure associated with the purchase of new production equipment. It is assumed that this initial expenditure will be depreciated using the simplified

straight-line method down to zero over 10 years. This project wil also require a one-time initial investment of $30,000 in net

working capital associated with inventory and that working capital investment will be recovered when the project is shut down.

Finally, assume that the firm's marginal tax rate is 34 percent.

a. What is the initial outlay associated with this project?

b. What are the annual free cash flows associated with this project for years 1 through 9?

c. What is the terminal cash flow in year 10 (that is, what is the free cash flow in year 10 plus and additional cash flows

associated with termination of the project?

d. What is the project's NPV given a 9 percent required rate of return?

10 (Inflation and project cash flows)

Carlyle Chemicals is evaluating a new chemical compound used in the manufacturing of a wide range of consumer products. The firm is concerned that inflation in the cost of raw materials will have an adverse effect on the projects cash flows. Specifically, the firm expects the cost per unit (which is currently $0.89) will rise at a rate of 14% annually over the next three years. The per-unit selling price is currently $0.98 and this price is expected to rise at a meager 3% annual rate over the next three years. If Carlyle expects to sell 6.5, 6.8, and 10 million units for the next three years, respectively, what is your estimate of the gross profits to the firm? Based on these estimates, what recommendation would you offer to the firm's management with the regard to this product? (Note: be sure to round each unit price and unit cost per year to the nearest cent)

The gross profit or (loss) for year 1 is $___ (round to the nearest dollar)

The gross profit or (loss) for year 2 is $___ (round to the nearest dollar)

The gross profit or (loss) for years 3 is $___ (round to the nearest dollar)

11(Real options and capital budgeting)

medium 50 200000

high 30 400000

a. what is the expected NPV for the MRI machine based on the above estimates? How would you interpret the meaning of the expected NPV? Does this look like

b.Assuming that the probability of the medium demand state remains 50% the maximum probability you can assign to the low demand state and still have an expected NPV of 0 or higher is....

12 (Scenario analysis) Family security is considering introducing tiny GPS trackers that can be inserted in the sole of a child's shoe, which would then allow for the tracking of that child if he or she was ever lost or abducted. The estimates, that might be off by 10% associated with this new product are shown here:

unit price ($) 125

variable cost ($) 75

fixed cost ($) 250000

expected sales (per year) 10000

estimate above or below by % 10

intial outlay (million Dollars) 1 1000000

number of years 10

required rate of return (%) 10

marginal tax rate 34

since this is new product line, you are not confident in your estimates and would like to know how will you will fare if your estimates on the items listed above as 10% higher or 10% lower than expected. Assume that this new product line will require an initial outlay of $ 1.00 million, with no working captial investment, and will last for 10 years, being depreciated down to zero using straight-line description. In addition,the firm's required rate of return or cost of capital is 10.0 %, and the firm's marginal tax rate is 34%. Calculate the projects NPV under the "best case scenario" (that is use the high estimates unit price 10% above expected, variable costs 10% less than expected, fixed costs 10% less than expected, and expected sales 10% more than expected). Calculate the Project's NPV under the "worst-case scenario".

13 (Real options and capital budgeting) you are considering introducing a new Tex-Mex-Thai fusion restaurant. The initial outlay on this new restaurant is $6.9 million and the present value of the free cash flows(excluding the initial outlay) is $ 4.9 million, such that the project has a negative expected NPV of $ 2.0 million. Upon closer examination, you find that there is a 55% chance that this new restaurant will be well received and will produce annual csah flows of $ 801,000 per year forever( a perpetuity), while there is a 45% chance of it producing a cash flow of only $191,000 per year forever (a perpetuity) if isn’t received well. The required rate of return you use to discount the project cash flows is 10.7% However, if the new restaurant is successful, you will be ale to build 12 more of them and they will have costs and cash flows similar to the successful restaurant's costs and cash flows.

a. In spite of the fact the first restaurant has a negative NPV, should you build it anyway? why or why not?

b. what is the expected NPV for this project if only one restaurant is built but isn't well received? what is the expected NPV for this project assuming 12 more are built if the first restaurant is well received? (Ignore he fact that there would be a time delay in building additional new restaurants.)

14 (Identifying spontaneous, temporary, and permanent sources of financing) Classify each of the following sources of new financing as spontaneous, temporary, or permanent (explain):

A.A manufacturing firm enters into a loan agreement with its bank that calls for annual principal and interest payments spread over the next four years.

B.A retail firm orders new items of inventory that are charged to the firm’s trade credit.

C.A trucking firm issues common stock to the public and uses the proceeds to upgrade its tractor fleet