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ndi"idual basis #ote: $ui% o& t'e similar kind o& (uestions ma) also 'eld 1. *"aluation o& Cas' +lo,s. Below are the cash flows for two mutually exclusive projects. year 0 ! # $ CFX (5,000) !,0"5 !,0"5 !,0"5 !,0"5 CFY (5,000) 0 0 0 %,&''
a. Calculate the pay(ac) for (oth projects. (. *+itially, the cost of capital is u+certai+, so co+struct ,-. profiles for the two projects (o+ the same /raph) to assist i+ the a+alysis. 0he profiles cross at what cost of capital1 2hat is the si/+ifica+ce of that1 c. *t is +ow 3etermi+e3 that the cost of capital for (oth projects is $4. 2hich project shoul3 (e selecte31 2hy1 3. Calculate the 5*66 for (oth projects, usi+/ the $4 cost of capital. 2. More practice ,it' Cas' +lo, *"aluation. Cash flows for two mutually exclusive projects are show+ (elow7 year 0 ! # CF5 ( 00) 0 &0 "0 CF, ( 00) '0 50 !0
Both projects have a cost of capital of 04. a. Calculate the pay(ac) for (oth projects. (. Calculate the ,-. for (oth projects. c. Calculate the *66 for (oth projects. 3. Calculate the 5*66 for (oth projects. -. *.pansion /ro0ect. 8 machi+e has a cost of 9 "0. *t will have a life of # years, a+3 will (e 3epreciate3 strai/ht li+e to :ero salva/e value. *t will result i+ sales reve+ue of 9!00 per year a+3 cash operati+/ costs of 9 0 per year. ;se of the machi+e will re<uire a+ i+crease i+ wor)i+/ capital of 9'0 for the # years, (e/i++i+/ at year 0. 0he appropriate 3iscou+t rate is "4 a+3 the firm=s tax rate is $04. a. (. c. 3. Calculate the i+itial cash flow at time 0. Calculate the a++ual operati+/ cash flows (they are i3e+tical each year). Calculate the releva+t termi+al cash flows at the e+3 of year #. 2hat is the ,-. for the machi+e1
4. 1isk 2d0ustment and /ro0ect Selection. 8cme 5f/ is co+si3eri+/ two projects, 8 > B, with cash flows as show+ (elow7 perio3 0 ! # $ CF8 ?50,000 !0,000 !0,000 !0,000 !0,000 CFB ? 00,000 &0,000 !5,000 !5,000 !5,000
0he opportu+ity cost of capital for 8 is $ perce+t. 0he opportu+ity cost of capital for B is 0 perce+t. a. Calculate the ,-. for each project. (. Calculate the *66 for each project. c. 2hich project(s) shoul3 (e accepte3 i+ each of the followi+/ situatio+s7 ( ) 0he projects are mutually exclusive a+3 there is +o capital co+strai+t. (!) 0he projects are i+3epe+3e+t a+3 there is +o capital co+strai+t. (#) 0he projects are i+3epe+3e+t a+3 there is a total of 9 00,000 of fi+a+ci+/ for capital outlays i+ the comi+/ perio3. 3. @xplai+ why the cost of capital for 8 mi/ht (e hi/her tha+ for B. 5. 1eplacement pro0ect: @xisti+/ machi+e was purchase3 ! years a/o at a cost of 9#,!00. *t is (ei+/ 3epreciate3 strai/ht li+e over its " year life. *t ca+ (e sol3 +ow for 9#,000 or use3 for & more years at which time it will (e sol3 for a+ estimate3 9500. *t provi3es reve+ue of 95,000 a++ually a+3 cash operati+/ costs of 9!,000 a++ually. 8 replaceme+t machi+e ca+ (e purchase3 +ow for 9',"00. *t woul3 (e use3 for & years, a+3 3epreciate3 strai/ht li+e. *t will result i+ a33itio+al sales reve+ue of 9 ,500 a++ually, (ut (ecause of its i+crease3 efficie+cy it woul3 re3uce cash operati+/ costs (y 9&00 per year. 0he +ew machi+e woul3 re<uire a33itio+al i+ve+tories of 9'00, a+3 accou+ts receiva(le woul3 i+crease (y 9#00. *ts expecte3 salva/e value i+ & years is 9!,000. 0he tax rate is $04 a+3 the re<uire3 rate of retur+ is #4. Ahoul3 the ol3 machi+e (e replace31 a. Calculate the i+creme+tal cash flow at time 0. (. Calculate the i+creme+tal a++ual operati+/ cash flows that result from the +ew machi+e. c. Calculate the i+creme+tal termi+al cash flow. 3. Ahow the i+creme+tal CFs i+ the ta(le (elow. Year 0 ! # $ Cash Flow BBBBBBBB BBBBBBBB BBBBBBBB BBBBBBBB BBBBBBBB