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Concept explainers
a)
To determine: IRR of each investment.
Introduction:
b)
To determine: The
Introduction:
The difference between the present value of
c)
To discuss: The best property to be chosen by K Company.
d)
To discuss: The reason why profitability index cannot be used in K Company’s budget of $12,000,000 instead and properties that can be used under this scenario.
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Chapter 7 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- Fenton, Inc., has established a new strategic plan that calls for new capital investment. The company has a 9.8% required rate of return and an 8.3% cost of capital. Fenton currently has a return of 10% on its other investments. The proposed new investments have equal annual cash inflows expected. Management used a screening procedure of calculating a payback period for potential investments and annual cash flows, and the IRR for the 7 possible investments are displayed in image. Each investment has a 6-year expected useful life and no salvage value. A. Identify which project(s) is/are unacceptable and briefly state the conceptual justification as to why each of your choices is unacceptable. B. Assume Fenton has $330,000 available to spend. Which remaining projects should Fenton invest in and in what order? C. If Fenton was not limited to a spending amount, should they invest in all of the projects given the company is evaluated using return on investment?arrow_forwardYou are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze six proposed capital investments. Each project has a cost of $1,000, and the required rate of return for each is 12%, determine for each project (a) the payback period, (b) the net present value, (c) the profitability index, and (d) the internal rate of return. Assume under MACRS the asset falls in the three-year property class and that the corporate tax rate is 25 percent. You are limited to a maximum expenditure of $3000 only for this capital budgeting period. Which projects you will accept and why? Justify your suggestions Project A Project B Project C Project D Project E Project F Investment -1000 -1000 -1000 -1000 -1000 -1000 1 150 200 250 800 900 1000 2 350 300 250 350 300 200 3 400 500 600 200 150 100 4 700 650 600 200 150 50 12 Capital Budgeting and Estimating Cash Flows Table 12.2 PROPERTY CLASS RECOVERY YEAR MACRS depreciation percentages 3-YEAR 5-YEAR 7-YEAR 10-YEAR…arrow_forwardFollowing is information on two alternative investments being considered by Jolee Company. The company requires a 10% return from its investments. For each alternative project, compute the (a) net present value and (b) profitability index. (Round your answers in part b to two decimal places.) If the company can only select one project, which should it choose?arrow_forward
- You are evaluating a real estate development project that requires an initial investment of $ 4,000,000. The project is expected to generate a net operating income of $550,000 per year with annual increases of 2% for the next 5 years. After 5 years, you expect to sell the developed property for $4,200,000. If your required rate of return is 14 %, what is the present value or investment value of the cash flows from the project? $4,136, 484 $3,768,350 $4,073,281 $ 4,225595arrow_forwardHasty Drums, Inc. is considering two independent projects and is using the internal rate of return technique to make a choice. Project X requires an initial investment of $80,000; it will have cash inflows at the end of each of the next five years of $25,000. Project Z requires an initial investment of $120,000; it has cash inflows of $40,000 at the end of each of the next four years. What are the IRRs of each project? Ace Corporation is considering expanding its operations. If it expands, its current accounts are expected to change. Cash will increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable are going to increase by $50,000, accruals by $10,000, and long-term debt by $100,000. What will be the change in net working capital? Zebra Corporation plans to sell an existing asset for $21,000. The asset cost $10,000 and it was being depreciated under MACRS using a five-year recovery period. Until now, it has been…arrow_forwardConsider an investment project in which you invest $3,500 today in order to receive $525 at the end of each of the next 10 years. If the cost of capital is 12% per year, what is the IRR and should the project be accepted? 7.23%, accept project 7.23%, reject project 5.28%, accept project 5.28%, reject project 8.14%, reject project 8.14%, accept project a. b. C. d. e. O f.arrow_forward
- Consider the six indivisible investment alternatives shown below. The planning horizon is 8 years. The MARR is 15%. $60,000 is available for investment. a. Which investments should be made in order to maximize present worth? b. Solve part a when investments N and P are mutually exclusive and R is contingent on Q.arrow_forwardAn investment company is considering one of two possible business ventures. Project 1 gives a return of $250 000 in four years’ time, whereas Project2 gives a return of $350 000 in eight years’ time. Which project should thecompany invest in when the interest rate is 7% compounded annually?arrow_forwardAssuming you are facing making a decision on a large capital investment proposal. the capital investment amount is $640,000, Estimated the study period is 8 years. The annual revenue at the end of each year is $180,000, and the estimated annual year-end expense is $42000starting in year one, Assuming a market value at the end year is $ 20,000, and the benchmark rate is 10%, Find the cash flow chart, the NPV, the dynamic payback period, and the IRR of this project.arrow_forward
- Your company has been presented with an opportunity to invest in a project. The facts on the project are presented below: The project is expected to operate as shown for ten years. If management expects to make 15% on its investments before taxes, would you recommend this project? Solve the Problem using Present Worth Method. show your solutionarrow_forwardGreater Findlay Development Consortium is preparing to open a new retail strip mall and have multiple businesses that would like lease space in it. Each business will pay a fixed amount of rent plus a percentage of the gross sales generated each year. The cash flows from each of the businesses has approximately the same amount of risk. The business names, annual expected cash flows, and initial capital outflow for each of the businesses that would like to lease space in the strip mall are provided below. Greater Findlay Development Consortium uses a 12% hurdle rate which is its cost of capital. All business will be evaluated based on 4-year term because the contract will expire in four years. Video Now Apple Garden Croger Mart Horizon Wireless Initial Capital Outlay ($200,000) ($298,000) ($248,000) ($272,000) Annual Net Cash Flows Year 1 65,000 100,000 80,000…arrow_forwardShaylee Corporation has $2.00 million to invest in new projects. The company's managers have presented a number of possible options that the board must prioritize. Information about the projects follows: Initial investment Present value of future cash flows Required: 1. Is Shaylee able to invest in all of these projects simultaneously? 2-a. Calculate the profitability index for each project. 2-b. What is Shaylee's order of preference based on the profitability index? Complete this question by entering your answers in the tabs below. Req 1 Project A $ 435,000 785,000 Req 2A and 2B Is Shaylee able to invest in all of these projects simultaneously? Is Shaylee able to invest in all of these projects simultaneously? Project C $ 740,000 1,220,000 Project D $ 965,000 1,580,000arrow_forward
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