23. A company is considering two mutually exclusive projects. Both require an initial cash outlay of Rs. 10,000 ( with no salvage value ) and a life of 5 years the company required rate of return is 10 % and it pays tax at a rate of 50 % . The project will be depreciated on a straight-line basis. The cash flows (before depreciation& taxes ) expected to be generated by the projects as follows. 1 2 3 4 5 4,000 3,000 4,000 5,000 Project A 4,000 Project B 6,000 Calculate the net present value & IRR of each project & suggest which project should be accepted & why. 4,000 2,000 4,000 5,000

23. A company is considering two mutually exclusive projects. Both require an initial cash outlay of Rs. 10,000 ( with no salvage value ) and a life of 5 years the company required rate of return is 10 % and it pays tax at a rate of 50 % . The project will be depreciated on a straight-line basis. The cash flows (before depreciation& taxes ) expected to be generated by the projects as follows. 1 2 3 4 5 4,000 3,000 4,000 5,000 Project A 4,000 Project B 6,000 Calculate the net present value & IRR of each project & suggest which project should be accepted & why. 4,000 2,000 4,000 5,000

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows

Section: Chapter Questions

Problem 19P

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A company is considering two mutually exclusive projects. Both require an initial cash outlay of Rs 10,000 each, and have a life of five years. The company’s required rate of return is 10 per cent and pays tax at a 50 per cent rate. The projects will be depreciated on a straight –line basis. The before taxes cash flows expected to be generated by the projects are as follows:ProjectBefore –tax Cash Flow (Rs)1 2 3 4 5A 4,000 4,000 4,000 4,000 4,000B 6,000 3,000 2,000 5,000 5,000Calculate for each project: 1. The payback2. The average rate of return3. The net present value and profitability index4. The internal rate of return .Which project should be accepted and why?
3. Baboki Ltd are planning to invest in a new project which will cost an initial P375 000 and they expect the following cash.Year Net Cash Profits (P)1 25 0002 55 0003 70 0004 80 0005 40 0006 30 000The investment will be depreciated to a scrap value of P175, 000 over the period of the project. Required: Calculate the Accounting Rate of Return (Return on Capital Employed) of the project.
Part B: Solve the following excersises: 1. A company is considering two mutually exclusive projects X and Y. Each require an initial investment of OMR 100,000.The after tax cash inflows associated with each project are as follows: Year Project X Cash flows Project Y Cash flows (Initial Investment) 120,000 120,000 25,000 20,000 2 ? ? 3 ? ? ? ? 5 ? ? (a) Complete the table where Payback period for Project X is 3.5 and for project Y is 4. (b) Which project is better?
15 A project will increase sales by $92,800 and cash expenses by $53,200. The project will cost $89,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The tax rate is 35 percent. What is the operating cash flow of the project using the tax shield approach?
Q. A project requires an initial investment in machinery of $400,000. Additional cash inflows of $150,000 at current price levels are expected for three years, at the end of which time the machinery will be scrapped. The machinery will attract tax-allowable depreciation of 30% on the RB basis, which can be claimed against taxable profits of the current year, which is soon to end. A balancing charge or allowance will arise on disposal. The tax rate is 40% and tax is payable 50% in the current year, 50% one year in arrears. The pre-tax cost of capital is 22% and the rate of inflation is 10%. Assume that the project is 100% debt financed. Required Assess whether the project should be undertaken.
19.Sunshine Love Company is considering two mutually exclusive project, one with a 4-year life and the other 6-year life. The after-tax cash flows from the two project are as follows: Project A (RM) |(400,000) Project B (RM) (400,000) Year 1 162,000 120,000 162,000 162,000 120,000 120,000 4 120,000 120,000 Assuming a 15 % required rate of return on both project, calculate each project's
A company is considering two mutually exclusive projects. Both require an initial cash outlay of Rs.20000 each and have a life of five years. The company’s required rate of return is 10% and pays tax at a 35% rate. The projects with be depreciated on a straight-line basis. The before taxes cash flows expected to be generated by the projects are as follows. Before-tax cash flows (Rs.) Project1 2 3 45 A 8000 8000 8000 8000 8000B 12000 6000 4000 10000 10000 calculate for each project. The NPV and the internal rate of return. Which project should be accepted and why.
A company is considering two mutually exclusive projects. Both require an initial cash outlay of Rs.20000 each, and have a life of five years. The company's required rate of return is 10% and pays tax at a 35% rate. The projects with be depreciated on a straight-line basis. The before taxes cash flows expected to be generated by the projects are as follows. Before-tax cash flows (Rs.) Project 1 2 3 4 5 A 8000 8000 8000 8000 8000B 12000 6000 4000 10000 10000 calcualte for each project: The NPV and the internal rate of return. Which project should be accepted and why.
The investment required for a project is estimated at OMR 50,000. The cash flows expected from the project are: Year 1 OMR 22,000, Year 2 OMR 24,000 and Year 3 OMR 18,000. In this case, the Payback period of the project is: O a. None of these O b. 1.76 yedars O c. 2.22 years o d. 2.34 years
1.) A project is estimated to cost P100,000, lasts 8 years and have a P10,000 salvage value. The annual gross income is expected to average P24,000, and annual expenses, excluding depreciation will total P6,000. If capital is earning 10% before income tax, determine if this is a desirable investment using A.) Rate of Return Method and B.) Annual Cost or Worth Method. II. Gradients (Shows solutions manually): 2.) The year-end operating and maintenance costs of a certain machine are estimated to be P12,000 the first year and to increase by P2,500 each year during its 4-year life. If capital is worth 12%, determine the equivalent uniform year-end costs. 3.) Annual maintenance costs for an equipment are P1,500 this year and are estimated to increase 10% each year every year. What is the present worth of maintenance cost for six years if i = 12%
A project will incur $500 in shutdown costs the year after the completion of the project. The tax rate is 25%. What is the tax shield resulting from these tax-deductible shutdown costs (where a negative number means a cash outflow and a positive number means an incremental cash inflow)? Question 4Answer a. $-125 b. $-105 c. $105 d. $125
8. An investment opportunity requires an initial cash outlay of £30,000. Cash flows are expected to be as follows: Year 1 Year 2 Year 3 Year 4 (£7,000) (£2,000) £13,000 £36,000 The company’s cost of capital is 9%. Depreciation is to be charged annually on a straight line basis over the life of the project. What is the NPV of the project? a. (£2,579) b. £27,421 c. £2,579 d. (27,421)