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23. Husky Inc. is considering a capital expansion project. The initial investment of undertaking this project is $214,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $50,850, $69,783, $71,332, $81,236 and $107,750 respectively.

Husky has a capital structure consisting of 60% debt and 40% equity. The after-tax cost of debt is 15% and the cost of equity is 37.50%.

what is the modified internal rate of return if Husky undertakes this project. Assuming that the positive cash inflow from undertaking this project will be reinvested at the weighted average cost of capital.

A. 18.39%
B. 19.20%
C. 20.83%
D. 21.65%

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Reid Wolff
Reid WolffLv2
30 Sep 2019

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20. Husky Inc. is considering a capital expansion project. The initial investment of undertaking this project is $214,500. This expansion project will last for five years. The net operating cash flows from the expansion project at the end of year 1, 2, 3, 4 and 5 are estimated to be $50,850, $69,783, $71,332, $81,236 and $107,750 respectively.
Husky has a capital structure consisting of 60% debt and 40% equity. The after-tax cost of debt is 15% and the cost of equity is 37.50%.
Based on Husky’s weighted average cost of capital calculated, what is the NPV of undertaking this expansion project? That is, what is the NPV if the weighted average cost of capital is used as the discount rate? Shall Husky undertake the investment project? (Points : 3.7)

A. NPV=$11,124.28. Husky shall undertake the investment project since NPV>0.
B. NPV=-$19,579.80. Husky shall not undertake the investment project since NPV<0.
C. NPV=-$10,114.80. Husky shall not undertake the investment project since NPV<0.
D. NPV=$23,062.83. Husky shall undertake the investment project since NPV>0.

Minks (Ltd) is a listed company that has been successful in the past decade. In 2021, the
company’s board has decided to expand its operations by embarking on a new project to gain more
market share. Minks (Ltd) would need to invest R30-million, payable at the beginning of the first
year of the project. The project is expected to have a four-year life span. The forecast financial are
as follows:
Year 1 2 3 4
Units sold per year 320 000 350 000 475 000 500 000
Price per unit sold (R/unit) 140 145 150 150
Variable cost per unit (R/Unit) 70 70 70 70
Fixed costs per annum (R) 2 500 000 2 500 000 2 700 000 2 700 000
Additional project information:
• Price and costing information are in current terms before the application of selling price
inflation of 7% per annum, variable cost inflation of 4% and fixed cost inflation of 5%;
• Current corporate tax is at 28% and the tax liability is payable in the year it arises. Assume
profit from the project is similar to its cash flow;
• Minks (Ltd) has a cost of debt of 10%;
• The risk-free rate is 7%, the return on the market where Minks (Ltd) is listed is 15% and it has
a beta coefficient of 1.1;
• It is the company’s policy to maintain a 40/60 debt/equity financing; and
• Minks (Ltd) uses its weighted cost of capital in all project appraisals.
Required:
Recommend whether Minks (Ltd) should embark on this expansion project or not. Show all your
calculations to justify your recommendation.

ANSWER THE FOLLOWING: SHOW WORK

24) In a stream of past dividends, the initial dividend is $1.25 and the most recent dividend is $1.80. The
number of years between these two dividends (n) is 9 years. What is the average growth rate during this
seven-year period? Use a calculator to determine your answer.


25) Bacon Signs Inc., purchases a machine for $70,000. This machine qualifies as a five-year recovery asset
under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 =
19.20%; year 4 = 11.52%, etc. The firm has a tax rate of 34%. If the machine is sold at the end of two years for
$50,000, what is the cash flow from disposal?


26) Mulligan, Inc. is currently considering an eight-year project that has an initial outlay or cost of $140,000.
The cash inflows from its project for years 1 through 8 are the same at $35,000. Mulligan has a discount rate of
13%. Because there is a shortage of funds to finance all good projects, Mulligan wants to compute the
profitability index (PI) for each project. That way Mulligan can get an idea as to which project might be a better
choice. What is the PI for Mulligan's current project?


27) Find the Modified Internal Rate of Return (MIRR) for the following series of future cash flows, given a
discount rate of 11%: Year 0: -$22,000; Year 1: $5,000; Year 2: $6,000; Year 3: $9,000; Year 4: $7,500; and,
Year 5: $8,000.


28) Rogers' Rotors has debt with a market value of $250,000, preferred stock with a market value of $50,000,
and common stock with a market value of $750,000. If debt has before-tax cost of 7%, preferred stock a cost of
9%, common stock a cost of 11%, and the firm has a tax rate of 34%, what is the WACC?
A) 9.12% B) 8.64% C) 10.88% D) 9.39%


29) Geronimo, Inc. is considering a project that has an initial outlay or cost of $220,000. The respective future
cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $80,000, and $90,000,
respectively. Geronimo uses the internal rate of return method to evaluate projects. Will Geronimo accept the
project if its hurdle rate is 10%?
A) Geronimo will not accept this project because its IRR is about 6.50%.
B) Geronimo will not accept this project because its IRR is about 9.36%.
C) Geronimo will not accept this project because its IRR is about 8.70%.
D) Geronimo will not accept this project because its IRR is about 4.60%.


30) The initial outlay or cost for a four-year project is $1,000,000. The respective cash inflows for years 1, 2, 3
and 4 are: $500,000, $200,000, $300,000, $300,000. What is the discounted payback period if the discount rate
is 10%?
A) About 2.67 years B) About 3.35 years
C) About 4.50 years D) About 3.76 years

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