### Question Description

**Assignment Steps**** **

**Resources: **Tutorial help on Excel^{®} and Word^{®} functions can be found on the Microsoft^{®}Office website. There are also additional tutorials via the web that offer support for office products.** **

**Complete** the following Questions and Problems from each chapter as indicated.

**Show** all work and analysis.** **

**Prepare** in Microsoft^{®} Excel^{®} or Word.** **

- Ch. 9: Questions 7 & 8 (Questions and Problems section)
- Ch. 10: Questions 3 & 13 (Questions and Problems section)
- Ch. 11: Questions 1 & 7 (Questions and Problems section)

**Format** your assignment consistent with APA guidelines if submitting in Microsoft^{®} Word.

I have attached a word document with all the questions

### Unformatted Attachment Preview

Purchase answer to see full attachment

## Final Answer

Please see the attachment for the pdf and .docx file of the solution.

Chapter 9 - Question 7:

Calculating IRR: A firm evaluates all its projects by applying the IRR rule. If the required

return is 14 percent, should the firm accept the following project?

Year

Cash Flow

0

-$26,000

1

11, 000

2

14,000

3

10,000

Solution:

The internal rate of return (IRR) is defined as the compound rate of return r that makes the

NPV equal to zero:

𝑁

𝐶𝐹0 + ∑

𝑡=1

−26,000 +

𝐶𝐹𝑡

=0

(1 + 𝑟)𝑡

11,000

14,000

10,000

+

+

=0

(1 + 𝑟) (1 + 𝑟)2 (1 + 𝑟)3

From Excel®, the solution is 𝑟 = 17%

∴ 𝑰𝑹𝑹 𝒊𝒔 𝟏𝟕%

Since the IRR (17%) is greater than the required rate of return (14%), the firm should go ahead

and accept the project.

Chapter 9

Question 8

Calculating NPV: For the cash flows in the previous problems, suppose the firm uses the NPV

decision rule. At a required return of 11 percent, should the firm accept this project? What if the

required return is 24 percent?

Solution:

With reference to the table in question 7,

𝑁

𝑁𝑃𝑉 = 𝐶𝐹0 + ∑

𝑡=1

𝐶𝐹𝑡

(1 + 𝑟)𝑡

𝑨𝒕 𝒓 = 𝟏𝟏% = 𝟎. 𝟏𝟏,

𝑁𝑃𝑉 = −26,000 +

11,000

14,000

10,000

+

+

2

(1 + 0.11) (1 + 0.11)

(1 + 0.11)3

𝑁𝑃𝑉 = −26,000 +

11,000 14,000 10,000

+

+

1.11

1.112

1.113

𝑁𝑃𝑉 = −26,000 + 9,909.91 + 11,362.71 + 7,311.91

𝑁𝑃𝑉 = $2,584.54

At a required return rate of 11%, NPV is positive (+$2,584.54), the firm should accept the

project.

𝑨𝒕 𝒓 = 𝟐𝟒% = 𝟎. 𝟐𝟒,

𝑁𝑃𝑉 = −26,000 +

11,000

14,000

10,000

+

+

2

(1 + 0.24) (1 + 0.24)

(1 + 0.24)3

𝑁𝑃𝑉 = −26,000 +

11,000 14,000 10,000

+

+

1.24

1.242

1.243

𝑁𝑃𝑉 = −26,000 + 8,870.97 + 9,105.10 + 5,244.87

𝑁𝑃𝑉 = −$2,799.06

At 24% required return rate, the NPV is a negative value (-$2,799.06). Therefore the firm

should not accept this project

Chapter 10 - Question 3

Calculating Project Net Income: A proposed new investment has projected sales of $635,000.

Variable costs are 44 percent of sales, and fixed costs are $193,000; depreciation is $54,000.

Prepare a pro forma income statement assuming a tax rate of 35 percent. What is the project net

income?

Solution:

Given:

Projected sales = $635,000

Variable costs = 44% of sales = 0.44 × $635,000 = $279,400

Fixed costs = $193,000

Depreciation = $54,000

Tax rate = 35%

Total Expenses: 279,400 + 193,000 + 54,000 = $526,400

Earning Before Interest and Tax (EBIT) = Projected Sales − Total Expenses

Earning Before Interest and Tax (EBIT) = 635,000 − 526,400 = $108,600

Taxes = 35% × EBIT = 0.35 × $108,600 = $38,010

∴ 𝐏𝐫𝐨𝐣𝐞𝐜𝐭 𝐍𝐞𝐭 𝐈𝐧𝐜𝐨𝐦𝐞 = 𝐄𝐁𝐈𝐓 − 𝐓𝐚𝐱 = $𝟕𝟎, 𝟓𝟗𝟎

Pro Forma Income Statement

Projected Sales

$635,000

Variable cost

$279,000

Fixed cost

$193,000

Depreciation

$54,000

Total Expenses

$526,400

Earnings Before Interest and Taxes (EBIT)

$108,600

Taxes

$38,010

Net Income

$70,590

The project Net Income is $70,590.

Chapter 10 – Question 13.

Project Evaluation: Dog up! Frank is looking at a new sausage system with an installed cost of

$540,000. This cost will be depreciated straight-line zero over the project’s five-year life, at the

end of which the sausage system can be scrapped for $80,000. The sausage system will save the

firm $170,000 per year in pretax operating costs, and the system requires an initial investment in

net working capital of $29,000. If the tax rate is 34 percent and the discount rate is 10 percent,

what is the NPV of the project?

Solution:

For the new sausage system

Annual depreciation =

$540,000

= $108,000

5

Aftertax salvage value = Market Value + (Book Value − Market Value) × Tax

Market Value = $80,000,

Book Value = $0

Tax = 34%

∴ Aftertax salvage value = MV + (0 − MV) × T = MV − MV ∙ T = 𝐌𝐕(𝟏 − 𝐓)

∴ Aftertax salvage value = $80,000(1 − 0.34) = $52,800

Applying the tax shield approach, the Operating Cash Flow (OCF) for the project is:

𝑂𝐶𝐹 = (𝑆 − 𝐶) × (1 − 𝑇) + 𝐷 × 𝑇

where: 𝑠 = 𝑡𝑜𝑡𝑎𝑙 𝑠𝑎𝑙𝑒𝑠,

𝑐 = 𝑐𝑎𝑠ℎ 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠, 𝐷 = 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛, and 𝑇 = 𝑡𝑎𝑥

∴ 𝑂𝐶𝐹 = $170,000(1 − 0.34) + (0.34 × 108,000) = 112,200 + 36720 = $148,920

The NPV f...

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors