5. The Western Publishing Company is faced with two mutually exclusive projects, A and B. According to the project A, the company is considering to expand its plant with an initial outlay of €40 million. The cash flow from the project A is estimated to be €s million each year for the next 18 years. The project B will be less expensive, €14 million, and it will provide a net cash flow of €3.2 million each year for the same period as project A. The cost of capital of the company is 10%. a) Calculate the NPV and IRR for each project. b) Construct the NPV profiles for each project. c) Considering the above answers, which project should the company select?
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- Suppose the multinational Milton Asset Extraction (MAX) is considering an overseas project in a country with substantial political risk. MAX predicts that the project will yield USD100 million each year for two years. The initial cost of the project is USD145 million. In any given year there is a 13% chance that the project will be expropriated by the host country’s government. The discount rate for the project is 8%. Calculate the expected net presentNUBD must choose one of two mutually exclusive projects. Project A has an up-front cost (t = 0) of P120,000, and it is expected to produce cash inflows of P80,000 per year at the end of each of the next two years. Two years from now, the project can be repeated at a higher up-front cost of P125,000, but the cash inflows will remain the same. Project B has an up-front cost of P100,000, and it is expected to produce cash inflows of P41,000 per year at the end of each of the next four years. Project B cannot be repeated. Both projects have a cost of capital of 10 percent. NUBD wants to select the project that provides the most value over the next four years. What is the net present value (NPV) of the project that creates the most value for NUBD? (Use replacement chain method)CreditCard Ltd, an credit card processor is considering the selection of one from two mutually exclusive investment projects (A and B), each with an estimated five-year life. The Project A requires initial investment of £1,000,000 and is forecast to generate annual cash flows of £300,000. Its estimated residual value after five years is £100,000. The Project B costs £120,000 with a forecast scrap value of £10,000. The Project B should generate annual cash flows of £40,000. The company operates a straight-line depreciation policy and discounts cash flows at 15 per cent p.a. CreditCard Ltd uses four investment appraisal techniques: payback period, net present value, internal rate of return and accounting rate of return (i.e. average accounting profit to average value of investment ARR of Project B rounded to a whole number is: A. 21% B. Has multiple solutions C. 18% D. 28%
- CreditCard Ltd, an credit card processor is considering the selection of one from two mutually exclusive investment projects (A and B), each with an estimated five-year life. The Project A requires initial investment of £1,000,000 and is forecast to generate annual cash flows of £300,000. Its estimated residual value after five years is £100,000. The Project B costs £120,000 with a forecast scrap value of £10,000. The Project B should generate annual cash flows of £40,000. The company operates a straight-line depreciation policy and discounts cash flows at 15 per cent p.a. CreditCard Ltd uses four investment appraisal techniques: payback period, net present value, internal rate of return and accounting rate of return (i.e. average accounting profit to average value of investment). IRR for Project A rounded to full percentage number is: (Hint: use 20% as the second discount rate) A. 10% B. 15% C. 17% D. 21%CreditCard Ltd, an credit card processor is considering the selection of one from two mutually exclusive investment projects (A and B), each with an estimated five-year life. The Project A requires initial investment of £1,000,000 and is forecast to generate annual cash flows of £300,000. Its estimated residual value after five years is £100,000. The Project B costs £120,000 with a forecast scrap value of £10,000. The Project B should generate annual cash flows of £40,000. The company operates a straight-line depreciation policy and discounts cash flows at 15 per cent p.a. CreditCard Ltd uses four investment appraisal techniques: payback period, net present value, internal rate of return and accounting rate of return (i.e. average accounting profit to average value of investment). A. According to the investment advice using payback period Project A should be preferred B. According to the investment advice using payback period Project B should be…CreditCard Ltd, an credit card processor is considering the selection of one from two mutually exclusive investment projects (A and B), each with an estimated five-year life. The Project A requires initial investment of £1,000,000 and is forecast to generate annual cash flows of £300,000. Its estimated residual value after five years is £100,000. The Project B costs £120,000 with a forecast scrap value of £10,000. The Project B should generate annual cash flows of £40,000. The company operates a straight-line depreciation policy and discounts cash flows at 15 per cent p.a. CreditCard Ltd uses four investment appraisal techniques: payback period, net present value, internal rate of return and accounting rate of return (i.e. average accounting profit to average value of investment). A. According to the investment advice using IRR Project B should be preferred B. According to the investment advice using IRR Project A should be preferred C. According to the investment…
- CreditCard Ltd, an credit card processor is considering the selection of one from two mutually exclusive investment projects (A and B), each with an estimated five-year life. The Project A requires initial investment of £1,000,000 and is forecast to generate annual cash flows of £300,000. Its estimated residual value after five years is £100,000. The Project B costs £120,000 with a forecast scrap value of £10,000. The Project B should generate annual cash flows of £40,000. The company operates a straight-line depreciation policy and discounts cash flows at 15 per cent p.a. CreditCard Ltd uses four investment appraisal techniques: payback period, net present value, internal rate of return and accounting rate of return (i.e. average accounting profit to average value of investment). A. NPV of Project A is 5,600 B. NPV of Project A is 55,300 C. NPV of Project A is 49,700 D. NPV of Project A is 19,050The company is considering two projects. The initial investment in the Project A and Bare $50,000 and $60,000 respectively. The Project A will generate annual cash flows of$26,000 for four years and the Project B will generate annual cash flows of $30,000 forfour years. What must be the required rate of return, so that the company will beindifferent between these two projects?(A)The required rate of return must be 21.86%.(B) The required rate of return must be 37.42%.(C)The required rate of return must be 34.90%.(D) The required rate of return must be 31.39%.The company WHY is evaluating the possibility of building a warehouse (the project'). It implies an immediate investment cost (year zero) of €350 million. The discounted value (year zero) of expected cash flows is €275 million. However, WHY has the option to further invest €125 million within 1 year, which will enable it to triplicate the warehouse capacity, increasing by 60% the discounted value of cash flows. Assume the following: • Risk free interest rate: 2% per year. • The project gross value follows a multiplicative binomial process. • Method for the computation of remaining relevant inputs: compound annual growth. The market value of the shadow asset is given by S. Currently S = 18 and the estimation is that within 1 year S = 29 and S = 12 for the scenarios of favourable and unfavourable market evolution, respectively. In your answers to the next questions make plausible assumptions if necessary. In case you prefer, standard characters can be used (e.g b rather than B,…
- Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. the initial outlay would be $11,700,000, and the project would generate cash flows of $1,200,000 per year for 20 years. the appropriate discount rate is 6.7%. A. Calculate the NPV b. Calculate the PI C. Calculate the IRR D. should this project be accepted? why or why not?A project in Switzerland costs $6 million. Over the next three years, the project will generate total operating cash flows of $2 million, $3.5 million, and $4 million, respectively The required rate of return is 14 percent. What is the break-even salvage value of this project? O$4.92 million O$4.23 million O $2.42 million O $3.69 million KRead the following case carefully and answer the questions:A company is considering two mutually exclusive expansion plans. Plan A requires a Rs. 40 millionexpenditure on a long-scale integrated plant that would provide expected cash flows of Rs. 6.4 million per yearfor 20 years. Plan B requires a Rs.12 million expenditure to build a somewhat less efficient, more laborintensiveplant with expected cash flows of Rs. 2.72 million per year for 20 years. The company's WACC is10%. You are required to solve the following questions:a. Calculate each project's NPV and IRR. [6]b. Graph the NPV profiles for plan A and Plan B and approximate the crossover rate. [3]c. Calculate the crossover rate where the two projects' NPVs are equal. [3]d. Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value?Explain.