ADMS 3530 Lecture Notes - Capital Requirement, Tax Rate, Scenario Analysis

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amethystarmadillo670

31 Mar 2013

School

York University

Department

Administrative Studies

Course

ADMS 3530

Professor

Lois King

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Document Summary

Question 1 - npv and other investment criteria (20 marks) Parts (a) and (b) below are related, but they are not related to parts (c). Consider the following project in parts (a) and (b). Maximum payback: 4 years. (a) compute the npv, profitability index and payback for the above project. Indicate whether the project should be accepted based on each of these three criteria and briefly justify your answers. (9 marks) Npv: -,000,000 + ,000,000 pv of a 5 year annuity at 12% = -,000,000 + Accept the project since the npv is positive. Accept the project since the pi is above zero. Payback: ,000,000 / ,000,000 = 3 1/3 years. Accept the project since the payback is less than the maximum payback of 4 years. 2 marks each for calculation, 1 mark for the conclusion (b) suppose that you later discover that at the end of the project it will cost ,500,000 to shut down the project.

Related Questions

Yr	Sates of Affairs Cash Flow	Mcarthys Cash Flow	Gotham Cash Flow
0	-$7,500,000	-$5,000,000	-$4,000,000
1	$5,000,000	$1,000,000	$5,750,000
2	$4,500,000	$2,000,000	$5,750,000
3	$3,000,000	$3,000,000	-$1,000,000
4	-$1,000,000	$4,000,000	$0.00
5	$2,500,000	$4,000,000
6	$2,500,000

Required rate of return: 8.00%

Calculate the payback period for each project. If our required payback period is 3 years which projects will we accept?

Calculate the Net Present Value of each project. Which projects should we accept?

Calculate the Internal rate of return for each project. Which projects should be accepted?

Calculate the Modified Internal Rate of Return for each project. Which projects should be accepted?

Calculated the Profitability Index for each project. Which projects should be accepted?

If the company only has$10,000,000 for projects which project(s) should be accepted using the equivalent Annual Annuity? Report the EEA for each project?

rubymosquito903

Capital budgeting criteria

A firm with a 13% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:

0 1 2 3 4 5

Project A -$12,000 $4,000 $4,000 $4,000 $4,000 $4,000
Project B -$36,000 $11,200 $11,200 $11,200 $11,200 $11,200

Calculate NPV for each project. Round your answers to the nearest cent.
Project A $
Project B $

Calculate IRR for each project. Round your answers to two decimal places.
Project A %
Project B %

Calculate MIRR for each project. Round your answers to two decimal places.
Project A %
Project B %

Calculate payback for each project. Round your answers to two decimal places.
Project A years
Project B years

Calculate discounted payback for each project. Round your answers to two decimal places.
Project A years
Project B years

Assuming the projects are independent, which one or ones would you recommend?
-Select-
Only Project B would be accepted because NPV(B) > NPV(A).
Both projects would be accepted since both of their NPV's are positive.
Only Project A would be accepted because IRR(A) > IRR(B).
Both projects would be rejected since both of their NPV's are negative.
Only Project A would be accepted because NPV(A) > NPV(B).
Item 11

If the projects are mutually exclusive, which would you recommend?
-Select-
If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project A.
If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project A.
If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project A.
If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project B.
If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project B.
Item 12

Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
-Select-
The conflict between NPV and IRR is due to the relatively high discount rate.
The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.
The conflict between NPV and IRR is due to the difference in the timing of the cash flows.
There is no conflict between NPV and IRR.
The conflict between NPV and IRR occurs due to the difference in the size of the projects.
Item 13

skybeaver388

Capital budgeting criteria

A firm with a 14% WACC is evaluating two projects for this year's capital budget. After-tax cash flows, including depreciation, are as follows:

Project A	-$3,000	$1,000	$1,000	$1,000	$1,000	$1,000
Project B	-$9,000	$2,800	$2,800	$2,800	$2,800	$2,800

Calculate NPV for each project. Round your answers to the nearest cent.
Project A $ {C}
Project B $ {C}

Calculate IRR for each project. Round your answers to two decimal places.
Project A {C}%
Project B {C}%

Calculate MIRR for each project. Round your answers to two decimal places.
Project A {C}%
Project B {C}%

Calculate payback for each project. Round your answers to two decimal places.
Project A {C} years
Project B {C} years

Calculate discounted payback for each project. Round your answers to two decimal places.
Project A {C} years
Project B {C} years

If the projects are mutually exclusive, which would you recommend?
-Select-If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project A.If the projects are mutually exclusive, the project with the highest positive MIRR is chosen. Accept Project A.If the projects are mutually exclusive, the project with the shortest Payback Period is chosen. Accept Project A.If the projects are mutually exclusive, the project with the highest positive IRR is chosen. Accept Project B.If the projects are mutually exclusive, the project with the highest positive NPV is chosen. Accept Project B.Item 12

Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR?
-Select-The conflict between NPV and IRR is due to the relatively high discount rate.The conflict between NPV and IRR is due to the fact that the cash flows are in the form of an annuity.The conflict between NPV and IRR is due to the difference in the timing of the cash flows.There is no conflict between NPV and IRR.The conflict between NPV and IRR occurs due to the difference in the size of the projects.Item 13

salmontrout306

ADMS 3530 Lecture Notes - Capital Requirement, Tax Rate, Scenario Analysis

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