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[answered] 1) As a manager evaluating capital investment projects, wha


I need help with my Financial Analysis quiz. 11 Questions and need to show work on those that require calculations. Needed by 5pm EST. PLEASE HELP!!!!?


1) As a manager evaluating capital investment projects, what hurdle rate of return is appropriate

 

to use when calculating NPV and under which circumstances? That is, we have discussed the

 

WACC and you know that reflects the average cost of raising funds from suppliers of capital.

 

So what rate should a manager use in evaluating a capital investment project for the firm and

 

why?

 

2) Your company purchased a piece of land five years ago for $150,000 and subsequently added

 

$175,000 in improvements. The current book value of the property is $225,000. There are

 

two options for future use of the land: 1) the land can be sold today for $375,000 after-tax; or

 

2) your company can destroy the past improvements and build a factory on the land. In

 

consideration of the factory project, what amount (if any) should the land be valued at for

 

purposes of the capital budgeting analysis? Explain your rationale.

 

3) Your company currently sells oversized golf clubs. The Board of Directors wants you to look

 

at replacing them with a line of super-sized clubs. Briefly explain whether the following are

 

relevant cash flows to this analysis and if so, how those cash flows can affect any decision.

 

Discuss each item individually.

 

a. $300,000 drop in sales from terminating the oversized line of clubs

 

b. $750,000 in land you own that may be used for the project

 

c. $200,000 spent on Research and Development last year on oversized clubs

 

d. $350,000 you will pay to Fred Singles to promote your new clubs

 

e.

 

$125,000 you will receive by selling the existing production equipment which must be

 

replaced

 

4)

 

a) Would a firm undertake an investment with an NPV of zero? If so, why?

 

b) How can firms position new ventures to have NPVs of greater than zero? What are some

 

strategies for that?

 

5) Why are interest charges on debt not deducted when determining a project?s net cash flows as

 

part of the capital budgeting process?

 

6) In terms of the capital structure of a firm, we know that there are significant differences

 

among industries and even among firms within industries. Discuss the factors that go into the

 

determination of the ?optimal? level of debt a firm should carry. List factors and then

 

discuss. 7) Assume two mutually exclusive investments have the following cash flows:

 

Project

 

Year 0

 

Year 1

 

Year 2

 

Year 3

 

Project A

 

-$200

 

$100

 

$100

 

$100

 

Project B

 

-$300

 

$150

 

$125

 

$150 Complete the following table assuming that the cost of capital is 10%: SHOW ALL WORK!

 

Under this Investment

 

Criteria which project

 

would you choose?

 

Project A

 

Project B

 

(Enter A or B)

 

NPV

 

IRR

 

Payback

 

MIRR

 

Profitability Index

 

Based on your answers in the table above, which project would you finally choose and why? Be

 

sure to show your work.

 

8) The president of Speedy Copy has asked you to evaluate the proposed acquisition of a new

 

copier. The copier equipment is expected to cost $30,000 and will be depreciated in a

 

straight-line manner for the three years of the asset?s life after which it will be worthless. Use

 

of the equipment will require an increase in net working capital (additional paper sizes which

 

can be accommodated by the new copier) of $4,000. Increased sales from Auburn University

 

Finance faculty looking for a working copier are expected to be $20,000 per year with

 

operating costs (excluding depreciation) of $5,000 per year. Calculate the initial outlay and

 

net cash flows for years 1-3. In other words, show the net cash flows for t=0, t=1, t=2, and

 

t=3. Speedy Copy?s marginal tax rate is 40 percent.

 

9) Hollingsworth Candy Products has an inventory turnover of six times per year, a receivables

 

turnover of 10 times, and a payables turnover of 12 times. What is Hollingsworth?s inventory

 

conversion period, the receivables collection period, and its payables deferral period? What

 

is its cash conversion cycle? Explain what this means to managers and why is this

 

important?

 

10) The Empire Manufacturing is considering acquisition of a new press machine for their

 

manufacturing facility in Pennsylvania. They have two machines from which to select.

 

Alternative A has a cost of $120,000. The net cash flow benefit in terms of added efficiency

 

from Alternative A amount to $65,000 per year for 3 years. Empire is also considering

 

Alternative B which will cost $170,000. Once in operation, they project that it will produce

 

benefits of $70,000 per year for 4 years. Inflation is expected to be zero during the next 4

 

years. If cash inflows occur at the end of each year, and if the cost of capital is 12%, which

 

of the two alternatives is will add the most value? Show your calculations and work. 11) A firm is planning for the next year and wants you to provide a forecast of the firm's

 

additional funds needed (AFN). The firm is operating at full capacity. Data for use in your

 

forecast are shown below. Based on the AFN equation, what is the Additional Funds Needed

 

(AFN) for the coming year? Dollars are in millions. Explain what this means to managers.

 

Last year's sales = S0

 

Sales growth rate = g

 

Last year's total assets = A0*

 

Last year's profit margin = PM $350

 

30%

 

$500

 

5% Last year's accounts payable

 

Last year's notes payable

 

Last year's accruals

 

Target payout ratio $40

 

$50

 

$30

 

60%

 


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