# Home work set 4

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• 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? Refer to text problems, (10-10). Capital Budgeting Methods
• You have a project in mind that will be able to meet the strategic objective of your organization. While evaluating the project, you found out that the project would cost \$600,000. Since you are introducing a new potential product in the market, you are very hopeful that your expected inflows will be \$30,000 per quarter for the first two years and then \$90,000 per quarter thereafter. What is the payback period of this project?
• Your company can accept one of three possible projects. Project A has a NPV OF \$30,000, it will take 5 years to complete and the associated cost will be \$10,000. Project B has NPV of \$60,000,it will take 3 years to complete and the cost will be \$15,000.Project C has NPV of \$80,000 and it will take 4 years complete and it will cost \$40,000.Based on the information, which project would you pick?
• Discuss cannibalization
• Discuss the process of cash flow estimation.
• 36 MONTHS
• 38 MONTHS
• 48 MONTHS
• 52 MONTHS
• They all have the same value
• PROJECT A
• PROJECT B
• PROJECT C

PLEASE ANSWER ALL QUESTIONS BY INDICATING ALL NECESSARY STEPS 1. 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? Refer to text problems, (10-10). Capital Budgeting Methods 2. You have a project in mind that will be able to meet the strategic objective of your organization. While evaluating the project, you found out that the project would cost \$600,000. Since you are introducing a new potential product in the market, you are very hopeful that your expected inflows will be \$30,000 per quarter for the first two years and then \$90,000 per quarter thereafter. What is the payback period of this project? a. b. c. d. 36 MONTHS 38 MONTHS 48 MONTHS 52 MONTHS 3. Your company can accept one of three possible projects. Project A has a NPV OF \$30,000, it will take 5 years to complete and the associated cost will be \$10,000. Project B has NPV of \$60,000,it will take 3 years to complete and the cost will be \$15,000.Project C has NPV of \$80,000 and it will take 4 years complete and it will cost \$40,000.Based on the information, which project would you pick? a. b. c. d. They all have the same value PROJECT A PROJECT B PROJECT C 4. Discuss cannibalization 5. Discuss the process of cash flow estimation.

Robert__F
School: UT Austin

Data
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Rate
NPV
IR
MIRR
PI

Project S Project L
-10000
-25000
3000
7400
3000
7400
3000
7400
3000
7400
3000
7400
0.12
0.12
\$814.33 \$1,675.34
15.24%
14.67%
15.24%
14.67%
8.14%
6.70%

Selection
L
S
S
S

Note: Since the project doesn't have additional cash outflows, IRR

ve additional cash outflows, IRR = MIRR

Months
0
3
6
9
12
15
18
21
24
27
30
33
36
39
42

Cash flow Cumulative cash flow Positive?
-600000
-600000 FALSE
30000
-570000 FALSE
30000
-540000 FALSE
30000
-510000 FALSE
30000
-480000 FALSE
30000
-450000 FALSE
30000
-420000 FALSE
30000
-390000 FALSE
30000
-360000 FALSE
90000
-270000 FALSE
90000
-180000 FALSE
90000
-90000 FALSE
90000
0 TRUE
90000
90000 TRUE
90000
180000 TRUE

Payback period
36 months

Data
Cost
NPV
Time
Annual PI

Project A Project B Project C
10000
15000
40000
30000
60000
80000
5
3
4
60%

133%

50%

Report: Homework set 4

Homework set 4
by HAL

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Anonymous
Excellent job

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