William is considering a project that would last for 3 years and have a cost of capital of 10.67 percent. The relevant level of net working capital for the project isexpected to be $9,020.00 immediately (at year 0); $32,800.00 in 1 year; $28,700.00 in 2 years; and $9,560.00 in 3 years. Relevant expected operating cash flowsand cash flows from capital spending in years 0, 1, 2, and 3 are presented in the following table. What is the net present value of this project?Year 2Year 1Year 3$51,500.00 $51,500.00 $51,500.00Operating cash flowsYear 0$0.00Cash flows from capital spending -$97,400.00$0.00$0.00 $7,500.00$85,281.21 (plus or minus $10)$116,892.76 (plus or minus $10)$99,834.34 (plus or minus $10)$21,671.09 (plus or minus $10)None of the above is within $10 of the correct answer

Answered: William is considering a project that…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5PA: Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated...

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Jasmine Manufacturing is considering a project that will require an initial investment of $52,000 and is expected to generate future cash flows of $10,000 for years 1 through 3, $8,000 for years 4 and 5, and $2,000 for years 6 through 10. What is the payback period for this project?
Redbird Company is considering a project with an initial investment of $265,000 in new equipment that will yield annual net cash flows of $45,800 each year over its seven-year life. The companys minimum required rate of return is 8%. What is the internal rate of return? Should Redbird accept the project based on IRR?
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?
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects’ NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital of 12%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?
Falkland, Inc., is considering the purchase of a patent that has a cost of $50,000 and an estimated revenue producing life of 4 years. Falkland has a cost of capital of 8%. The patent is expected to generate the following amounts of annual income and cash flows: A. What is the NPV of the investment? B. What happens if the required rate of return increases?
Staten Corporation is considering two mutually exclusive projects. Both require an initial outlay of 150,000 and will operate for five years. The cash flows associated with these projects are as follows: Statens required rate of return is 10%. Using the net present value method and the present value table provided in Appendix A, which of the following actions would you recommend to Staten? a. Accept Project X and reject Project Y. b. Accept Project Y and reject Project X. c. Accept Projects X and Y. d. Reject Projects X and Y.
Kelli is considering a project that would last for 3 years and have a cost of capital of 10.98 percent. The relevant level of net working capital for the project is expected to be $9,620.00 immediately (at year 0); $30,700.00 in 1 year; $27,500.00 in 2 years; and $8,520.00 in 3 years. Relevant expected operating cash flows and cash flows from capital spending in years 0, 1, 2, and 3 are presented in the following table. What is the net present value of this project? Operating cash flows Year 0 $0.00 Year 1 Year 2 Year 3 $52,500.00 $52,500.00 $52,500.00 Cash flows from capital spending -$97,700.00 $0.00 $0.00 $7,800.00 O $99,678.69 (plus or minus $10) $84,352.32 (plus or minus $10) O $114,320.23 (plus or minus $10) $24,215.27 (plus or minus $10) None of the above is within $10 of the correct answer
XYZ is considering a project that would last for 3 years and have a cost of capital of 18.20 percent. The relevant level of net working capital for the project is expected to be $2,020.30 immediately (at year 0); $4,790.00 in 1 year; $14,000.00 in 2 years; and $0.00 in 3 years. Relevant expected revenue, costs, depreciation, and cash flows from capital spending in years 0, 1, 2, and 3 are presented in the following table. The tax rate is 54.90 percent. What is the net present value of this project? . Year 0 Revenue $ Year 1 Year 2 Year 3 $12,500.00 $10,400.00 $12,100.00 $3,990.00 $3,980.00 $3,500.00 $2,200.00 $2,250.00 $2,100.00 0.00 $ 0.00 0.00 Costs Depreciation $ Cash flows from capital spending $-5,910.00 $1,350.00 $ 20.00 $3,770.00 $7794.24 (plus or minus $10) $580.25 (plus or minus $10) $5323.60 (plus or minus $10) $10279.59 (plus or minus $10) None of the above is within $10 of the correct answer
What is the minimum cash flow that could be received at the end of year 3 to make the following project "acceptable"? Initial cost = $100,000; cash flows at end of years 1 and 2 = $35,000; opportunity cost of capital = 8% a) $39,256.2 b) $47,347.2 c) $29,494.5 d) $37,250.5
Vaughn Company has the following information about a potential capital investment: Initial investment Annual cash inflow Expected life Cost of capital $ 340,000 $ 80,000 7 years 13% 1. Calculate the net present value of this project. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Round the final answer to nearest whole dollar.) Net Present Value
XYZ is evaluating a project that would last for 3 years. The project's cost of capital is 15.60 percent, its NPV is $43,200.00 and the expected cash flows are presented in the table. What is X? Years from today 0 1 2 3 Expected Cash Flow (in $) -55,800 71,000 -15,900 X O An amount less than $43,200.00 or an amount greater than $82,666.00 O An amount equal to or greater than $70,205.00 but less than $82,666.00 O An amount equal to or greater than $60,505.00 but less than $70,205.00 O An amount equal to or greater than $53,257.00 but less than $60,505.00 O An amount equal to or greater than $43,200,00 but less than $53,257.00 M
Better Health Inc. is evaluating two capital investments, each of which requires an up-front (time 0) expenditure of $1.5 million. The projects are expected to produce the following net cash inflows: Year Project A ($) Project B ($) 1 500,000 2,000,000 2 1,000,000 1,000,000 3 2,000,000 600,000 a. What is each project’s IRR? b. What is each project’s NPV if the opportunity cost of capital is 10 percent? 5 percent? 15 percent?

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