What are the time value of money calculations?

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timer Asked: Feb 2nd, 2018
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Question Description

Time Value of Money Calculations

The IT department has requested an update in its server population. This upgrade is required to maintain a competitive position. The CEO has asked that you evaluate the project and submit a recommendation to her, in terms of whether the company should move forward with this request. The calculated value of the project is a reduction of expenses, including power and replacement costs, as shown in Table-1:

Year

Decrease in Expenses

1 $30,000.00
2 $100,000.00
3 $120,000.00
4 $100,000.00
5 $30,000.00

Assume the impact after five years to be immeasurable. The cost of capital to the firm is currently 8% and the cost of the project today is $286,000.
Required:

  • Calculate the net present value of the project
  • Calculate the internal rate of return
  • Calculate the payback period
  • Calculate the discounted payback period

Submit an Excel file with your calculations, and a 2-to-5-page paper that explains the calculations and provides your final assessment and decision. Justify your recommendations. The paper must be submitted as a Word document and it must follow APA style guidelines.

Unformatted Attachment Preview

Template for the Module 1_Assignment 3 Firm's Cost of Capital Year Annual Cash Flows 0 1 2 3 4 5 Part 1: Calculate the Net Present Value and Explain Results YouTube Link on How to do NPV Calculations in Excel below. Copy and paste into your browser https://www.youtube.com/watch?v=YdCkyNMFbOo PV of Savings Initial Investment Net Present Value hover over cell to see comments - hint: (NPV) Explain results below Part 2: Calculate the Internal Rate of Return and Explain Results YouTube Link on How to do IRR Calculations in Excel below. Copy and paste into your browser https://www.youtube.com/watch?v=xzqpfpq6vSk Internal Rate of Return (IRR) Explain results below hint: Part 3: Calculate the Payback Period and Explain Results YouTube Link on How to do Payback Calculations in Excel below. Copy and paste into your browser https://www.youtube.com/watch?v=NwSmUDvWTPA Annual Cash Flows Payback Period hint: Balance Forward Explain results below hint: Part 4: Calculate the Discounted Payback Period and Explain Results YouTube Link on How to do Discount Payback Calculations in Excel below. Copy and paste into your browser https://www.youtube.com/watch?v=XwwLC7ood2U Annual Cash Flows Firm's Cost of Capital 8% - - - - Explain results below hint: Part 5: Analyze Results and Make Recommendations References: Module 2_Assignment 2 (Template) Question 1: What is the Beta Coefficient for Concordia? Table-1: Plant Beta Coefficient % of Concordia's Income South Town 0,85 55% North Town 0,90 20% East Town 1,25 15% West Town 1,60 10% Question 1: Beta Coefficient for Concordia Explain your answer: ← hint Solution Question 2: What is the Required Rate of Return for Concordia? Risk-free Rate Market Risk of Interest Premium (RP) (RF) 3,00% 4,00% Explain your answer: ← hint ← hint ← hint Concordia's Concordia Composit Beta (B) Required Rate of Return (kreq) ← hint Question 3a: What is the equation for the Security Market Line (SML)? ← hint 3b: Graph the equation 3c: Explain what the SML is telling you and the implications for the firm ← hint Question 4: Based on the information provided in the case, if the new plant is expected to return 12%, should Concordia make the investment? Explain your answer and justify your calculations. ← hint References: Module 3_Assignment 2 Template Cost of Capital Year 0 1 2 3 4 5 PV of CF's NPV IRR $ $ $ $ $ $ 8,0% Project A (8.000,00) 2.300,00 2.300,00 2.300,00 2.300,00 2.300,00 $ $ $ $ $ $ 8,0% Project A (10.000,00) 3.000,00 3.000,00 3.000,00 3.000,00 3.000,00 $ $ $ $ $ $ 8,0% Project A (9.000,00) 2.800,00 2.800,00 2.800,00 2.800,00 2.800,00 $ $ $ $ $ $ 8,0% Project A (8.500,00) Initial Cost 2.100,00 2.100,00 Positive 2.100,00 Cash Flows 2.100,00 2.100,00 ← Hint Part 1a: Find NPV for each project Project A Project A https://www.youtube.com/watch?v=s2ZZFjC2UBU NPV $0 $0 Project A Project A ← Hint $0 $0 Part 1b: Explain your findings Part 2a: Calculate the IRR for each project https://www.youtube.com/watch?v=z_EXlBMpzeQ Project A Project A IRR 0,0% 0,0% Part 2b: Explain your findings Part 3: Which projects should be selcect and why? ← Hint Project A 0,0% Project A 0,0% Assume for Parts 4 , 5 and 6 that if the projects meet the NPV and IRR test, Project A will be implimented in Year 1, Project B will be implement in Year 2, Project C will be implemented in Year 3 and Project D will be implemented in Year 4. Part 4: What will the total dividends and the external financing be if the current dividend per share is maintained? Year After Tax Income 1 2 3 4 $ $ $ $ Dividend Capital Expenditure External Funding Required 6.000,00 8.000,00 5.000,00 7.000,00 Additional Funding Required ← Hints ← Hint Part 5: What will the total dividends and the external financing be if the dividend payout ratio is 50% of After-Tax Income? Year After Tax Income 1 2 3 4 $ $ $ $ Dividend Capital Expenditure External Funding Required 6.000,00 8.000,00 5.000,00 7.000,00 Additional Funding Required ← Hints ← Hint Part 6: What will the total dividends and the external financing be if the company uses a residual dividend payout policy? Year After Tax Income 1 2 3 4 $ $ $ $ 6.000,00 8.000,00 5.000,00 7.000,00 Dividend Capital Expenditure External Funding Required ← Hints Additional Funding Required ← Hint Part 7: Under which dividend policy would the external funding requirement be minimized? Be sure to justify your answer. References: Module 4_Assignment 2 Template Question 1a: What is the annual cost, before any tax considerations of the lease options? Question 1b: Are there any tax considerations and if so, what is the after-tax annual cost of the lease? annual lease payments year net lease payment after-tax annual tax savings ← Hints 1 2 3 4 Total ← Hint Question 2: What is the total cost of leasing the truck today? Net lease payment after-tax Cost of Capital Number of lease payments Total cost of leasing truck today https://www.youtube.com/watch?v=r_hOGfSgvHQ ← Hints ← Hint Question 3: What are the annual cash flows if the truck is purchased with debt financing? Depreciable Value of Truck Year Depreciation Depreciation Rate using Write-off per MACRS Year Annual Tax Savings ← Hints 1 2 3 4 Total Tax-Savings Year Annual Cost of Annual TaxTruck Savings ← Hint Annual Cash Outflow ← Hints 1 2 3 4 Cost to Purchase less Tax-Savings Question 4: What is the cost of purchasing the truck with debt financing today? Cost of Truck less: TaxSavings Net Cost of Truck Question 5: Make a recommendation to your boss as to whether the company should buy or lease the truck. Justify your recommendation References: Module 5, Assignment 1 Template Part 1: Collections and Payments JAN SALES (given) 162.000 % FEB 168.000 MARCH 324.000 Collections Month of Sale Month after Sale 2nd Month after Sale Total Recepts Purchase of Labor and Materials Purchase of Labor and Materials Payment Part 2: Net Cash Flow for the Month Total Receipts: Payments: Labor and Materials (from above) Administrative Salaries Lease Payments Income taxes Miscellaneous Expenses Boat Dock Total Payments Net Cash Surplus (Deficient) Part 3: Surplus or Loan Requirements Cash at beginning of the month Cumulative Cash Less: Minimum Cash Surplus/Loan Requirements MARCH APRIL 485.000 MAY 648.000 JUNE 325.000 JULY 325.000 AUG 80.000 SEPT 162.000 APRIL MAY JUNE JULY AUG SEPT ...
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Tutor Answer

puritymaruga
School: Duke University

Attached.

Template for the Module 1_Assignment 3
Firm's Cost of Capital
Year

0.08
Annual Cash Flows
0
1
2
3
4
5

(286,000.00)
30,000.00
100,000.00
120,000.00
100,000.00
30,000.00
Total 5 year savings
380,000.00
Part 1: Calculate the Net Present Value and Explain Results
YouTube Link on How to do NPV Calculations in Excel below. Copy and paste into your browser

PV of Savings
Initial Investment
Net Present Value

https://www.youtube.com/watch?v=YdCkyNMFbOo
$588,692.01 hover over cell to see comments
(286,000.00)
hint:
$302,692.01
(NPV)

Explain results below

Part 2: Calculate the Internal Rate of Return and Explain Results
YouTube Link on How to do IRR Calculations in Excel below. Copy and paste into your browser

https://www.youtube.com/watch?v=xzqpfpq6vSk
Internal Rate of Return
Explain results below

(IRR)
hint:

Part 3: Calculate the Payback Period and Explain Results
YouTube Link on How to do Payback Calculations in Excel below. Copy and paste into your browser

https://www.youtube.com/watch?v=NwSmUDvWTPA
Annual Cash Flows
Payback Period
hint:
(286,000.00)
(286,000.00)
30,000.00
(256,000.00) Balance Forward
100,000.00
120,000.00
100,000.00
30,000.00
Explain results below
hint:
Part 4: Calculate the Discounted Payback Period and Explain Results
YouTube Link on How to do Discount Payback Calculations in Excel below. Copy and paste into your browser

https://www.youtube.com/watch?v=XwwLC7ood2U
Annual Cash Flows
Firm's Cost of Capital

8%

(286,000.00)
30,000.00

(286,000.00)
27,777.78

(286,000.00)
(258,222.22)

100,000.00
120,000.00
100,000.00
30,000.00

Explain results below
hint:
Part 5: Analyze Results and Make Recommendations

References:

30000
100000
120000
100000
30000

380000

Module 2_Assignment 2 (Template)
Question 1: What is the Beta Coefficient for Concordia?
Table-1:
Plant
Beta Coefficient
% of Concordia's Income
South Town
0.85
55%
North Town
0.90
20%
East Town
1.25
15%
West Town
1.60
10%
Question 1: Beta Coefficient for Concordia
Explain your answer:

← hint
Solution

Question 2: What is the Required Rate of Return for Concordia?
Risk-free Rate
Market Risk
of Interest
Premium (RP)
(RF)
3.00%
4.00%
Explain your answer:

← hint

← hint

← hint

Concordia's
Concordia Composit Beta (B) Required Rate of
Return (kreq)
← hint

Question 3a: What is the equation for the Security Market Line (SML)?
← hint
3b: Graph the equation

3c: Explain what the SML is telling you and the implications for the firm

← hint

Question 4: Based on the information provided in the case, if the new plant is
expected to return 12%, should Concordia make the investment? Explain your
answer and justify your calculations.

← hint

References:

Module 3_Assignment 2 Template
Cost of Capital
Year
0
1
2
3
4
5
PV of CF's
NPV
IRR

$
$
$
$
$
$

8.0%
Project A
(8,000.00)
2,300.00
2,300.00
2,300.00
2,300.00
2,300.00

$
$
$
$
$
$

8.0%
Project A
(10,000.00)
3,000.00
3,000.00
3,000.00
3,000.00
3,000.00

$
$
$
$
$
$

8.0%
Project A
(9,000.00)
2,800.00
2,800.00
2,800.00
2,800.00
2,800.00

$
$
$
$
$
$

8.0%
Project A
(8,500.00) Initial Cost
2,100.00
2,100.00
Positive
2,100.00
Cash Flows
2,100.00
2,100.00
← Hint

Part 1a: Find NPV for each project
Project A
Project A
https://www.youtube.com/watch?v=s2ZZFjC2UBU
NPV
$0
$0

Project A

Project A
← Hint
$0

$0

Part 1b: Explain your findings

Part 2a: Calculate the IRR for each project
https://www.youtube.com/watch?v=z_EXlBMpzeQ
Project A
Project A
IRR
0.0%
0.0%
Part 2b: Explain your findings

Part 3: Which projects should be selcect and why?

← Hint
Project A
0.0%

Project A
0.0%

Assume for Parts 4 , 5 and 6 that if the projects meet the NPV and IRR test, Project A will be
implimented in Year 1, Project B will be implement in Year 2, Project C will be implemented in Year 3
and Project D will be implemented in Year 4.

Part 4: What will the total dividends and the external financing be if the current dividend per share
is maintained?

Year

After Tax Income
1
2
3
4

$
$
$
$

Dividend

Capital
Expenditure

External Funding
Required

6,000.00
8,000.00
5,000.00
7,000.00
Additional Funding Required

← Hints

← Hint

Part 5: What will the total dividends and the external financing be if the dividend payout ratio is
50% of After-Tax Income?

Year

After Tax Income
1
2
3
4

$
$
$
$

Dividend

Capital
Expenditure

External Funding
Required

6,000.00
8,000.00
5,000.00
7,000.00
Additional Funding Required

← Hints

← Hint

Part 6: What will the total dividends and the external financing be if the company uses a residual
dividend payout policy?

Year

After Tax Income
1
2
3
4

$
$
$
$

6,000.00
8,000.00
5,000.00
7,000.00

Dividend

Capital
Expenditure

External Funding
Required

← Hints

Additional Funding Required

← Hint

Part 7: Under which dividend policy would the external funding requirement be minimized? Be
sure to justify your answer.

References:

Module 4_Assignment 2 Template
Question 1a: What is the annual cost, before any tax considerations o...

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Anonymous
awesome work thanks

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