Financial Management assessment

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To complete the unit assignment, click here to download the worksheet, and type your answers in the fields provided. Save the document using your last name and student ID. Once complete, upload your assignment to Blackboard for grading.

Textbook: Titman, S., Keown, A. J., & Martin, J. D. (2014). Financial management: Principles and applications (12th ed.). Upper Saddle River, NJ: Pearson.

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BBA 3301 Unit VII Assignment Instructions: Enter all answers directly in this worksheet. When finished select Save As, and save this document using your last name and student ID as the file name. Upload the data sheet to Blackboard as a .doc, .docx or .rtf file when you are finished. Question 1: (10 points). (Net present value calculation) Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $4,000,000 and would generate annual net cash inflows of $900,000 per year for 7 years. Calculate the project's NPV using a discount rate of 5 percent. (Round to the nearest dollar.) a. If the discount rate is 5 percent, then the project's NPV is: $ Question 2: (30 points). (Net present value calculation) Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $90,000 and will generate net cash inflows of $19,000 per year for 11 years. To answer Orange item questions, keep the text that is the best answer. a. What is the project's NPV using a discount rate of 7 percent? (Round to the nearest dollar.) If the discount rate is 7 percent, then the project's NPV is: $ Should the project be accepted? The project should be or should not be positive or negative and therefore accepted because the NPV is adds or subtracts value to the firm. b. What is the project's NPV using a discount rate of 16 percent? If the discount rate is 16 percent, then the project's NPV is: $ Should the project be accepted? Why or why not? c. What is this project's internal rate of return? (Round to two decimal places.) This project's internal rate of return is: % Should the project be accepted? Why or why not? If the project's required discount rate is 7%, then the project accepted because the IRR is higher than or lower than should be or should not be the required discount rate. If the project's required discount rate is 16%, then the project accepted because the IRR is higher than or lower than should be or should not be the required discount rate. Question 3: (15 points). (Related to Checkpoint 11.2) (Equivalent annual cost calculation) Barry Boswell is a financial analyst for Dossman Metal Works, Inc. and he is analyzing two alternative configurations for the firm's new plasma cutter shop. The two alternatives that are denoted A and B below perform the same task and although they each cost to purchase and install they offer very different cash flows. Alternative A has a useful life of 7 years whereas Alternative B will only last for 3 years. The after-tax cash flows from the two projects are as follows: BBA 3301 Unit VII Assignment a. Calculate each project's equivalent annual cost (EAC) given a discount rate of 10 percent. (Round to the nearest cent.) a. Alternative A's equivalent annual cost (EAC) at a discount rate of 10% is: b. Alternative B's equivalent annual cost (EAC) at a discount rate of 10% is $ $ b. Which of the alternatives do you think Barry should select? Why? (Select the best choice below.) a. This cannot be determined from the information provided. b. Alternative B should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative A. c. Alternative A should be selected because its equivalent annual cost is less per year than the annual equivalent cost for Alternative B. d. Alternative A should be selected because it has the highest NPV. Answer: Question 4: (10 points). (IRR calculation) What is the internal rate of return for the following project: An initial outlay of $9,000 resulting in a single cash inflow of $15,424 in 7 years. (Round to the nearest whole percent.) a. The internal rate of return for the project is: % Question 5: (10 points). (IRR calculation) Jella Cosmetics is considering a project that costs $750,000 and is expected to last for 9 years and produce future cash flows of $180,000 per year. If the appropriate discount rate for this project is 17 percent, what is the project's IRR? (Round to two decimal places.) a. The project's IRR is: % Question 6: (10 points) (IRR, payback, and calculating a missing cash flow) Mode Publishing is considering a new printing facility that will involve a large initial outlay and then result in a series of positive cash flows for four years. The estimated cash flows associated with this project are: BBA 3301 Unit VII Assignment If you know that the project has a regular payback of 2.9 years, what is the project's internal rate of return? a. The IRR of the project is: % Question 7: (15 points) (Mutually exclusive projects and NPV) You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash flows: If the appropriate discount rate on these projects is 11 percent, which would be chosen and why? (Round to the nearest cent.) a. The NPV of Project A is: b. The NPV of Project B is: $ $ Which project would be chosen and why? (Select the best choice below.) a. b. c. d. Cannor choose without comparing their IRRs. Choose A because its NPV is higher. Choose both because they both have positive NPVs. Choose B because its NPV is higher. Answer: UNIT VII STUDY GUIDE Capital Budgeting Course Learning Outcomes for Unit VII Upon completion of this unit, students should be able to: 7. Perform a capital budgeting analysis. 7.1 Contrast mutually exclusive project decisions and stand-alone project decisions. 7.2 Calculate project feasibility using various capital budgeting methods. Reading Assignment Chapter 11: Investment Decision Criteria, pp. 328-361 Unit Lesson Capital budgeting is a decision process used to decide when to accept independent projects or select among alternatives in the case of competing or mutually exclusive projects. In both cases, capital budgeting must add value to an organization. Different capital budgeting methods can result in conflicting results. Take the case of United Drone Company as an example. United Drone Company manufactures commercial drones and wants to find a centrally located distribution center to supply its dealers. Jerry Hampton, the controller, has three potential locations he wants to evaluate. Hampton has identified Chicago, Denver, and St. Louis as potential sites for a distribution center. United will lower costs by building a distribution center. Increased cash flow results from these lower costs. These cost savings improves cash flow as follows: Projected cash flows for each year exclude depreciation because it does not affect cash, but it does reduce taxable income, lowering income tax payments included in these cash flows. To get an idea of how long it will take for United to recover its investment, Hampton performs a quick payback analysis. Results of this analysis show the following: BBA 3301, Financial Management 1 UNIT x STUDY GUIDE Title By making this calculation, Hampton has an idea about how long each location will take to cover the initial investment. Hampton notices that after these payback periods it appears each investment will have positive cash flows, but he cannot tell which investment has superior cash flows. Keeping payback in mind, Hampton decides to calculate net present value (NPV) to look at the discounted cash flows over the life of each facility. Discounting brings each alternative's cash flows back to what they are worth in today's dollars allowing Hampton to compare "apples to apples." Assuming a cost of capital for United of 9.5%, a NPV analysis reveals the following: Although Denver has the shortest payback, Chicago has the highest NPV followed by Denver. St. Louis has a much lower NPV than Chicago or Denver. Payback fails to take the cash flows after the payback period into consideration. Failure to consider these cash flows results in conflicting outcomes. Hampton still wants to know the returns on an investment in each location, which neither payback period nor NPV calculations show. Because Hampton desires some measure of return on investment, he decides to calculate internal rate of return (IRR). IRR calculates a return on capital by solving for a rate where the present value of the cash flows equates to zero. This calculation done by hand is an iterative process, which means an assumption is first made about what rate will produce the desired result. Once tried, someone making this calculation can try a higher or lower rate to move toward a rate where the present value of the cash flows equates with zero. Using a spreadsheet like Excel makes such a calculation easy. For example, Hampton calculated IRR for each location as follows: BBA 3301, Financial Management 2 UNIT x STUDY GUIDE Title As an example, Excel uses the IRR financial function as follows: Notice in the values box, the cell references correspond with the spreadsheet for both the initial and subsequent cash flows. Excel does all the work by performing the iterations needed to achieve a workable solution. Hampton has an idea of return on investment by making these calculations and compares the result with United's 9.5% cost of capital. Because all three scenarios result in much higher IRRs than 9.5%, they all will have positive results. Hampton can make a case for Chicago because it has the highest NPV, but Denver is close behind and has a faster payback and higher IRR. Again conflicting results hamper Hampton's decision. Another method Hampton can try is to calculate profitability index for each location. Profitability index simply divides present value (PV) of the cash flows by the initial investment. If a location's profitability index is greater than one, it means it has cash flows with a PV greater than the initial investment. United should accept the project with the highest profitability index and NPV because it results in adding the greatest value to the firm. Hampton calculated profitability index for each location as follows: BBA 3301, Financial Management 3 UNIT x STUDY GUIDE Title Upon Hampton's review of these numbers, he finds Denver has a higher profitability index despite Chicago having a higher NPV. Again, conflicting results confront Hampton. Hampton decides to select Chicago because despite a lower profitability index and IRR it still adds the most value to the firm. Because these projects are mutually exclusive, Hampton has to decide which project to invest in. United may have other independent projects where a choice between projects is not necessary. Mutually exclusive projects are those where a firm considers alternatives. Decision makers like Hampton have to select the best alternative. Independent projects do not compete with other projects, but a firm still needs to decide if the project adds value to the firm or not. Although Hampton has made a decision by selecting Chicago, he can verify his decision using other capital budgeting methods. For example, using the discounted payback method can improve results from use of the conventional payback method. Modified internal rate of return (MIRR) improves the results from IRR by eliminating any change in direction of cash flows under conventional IRR. Another factor influencing capital budgeting decisions is the discount rate used in discounting cash flows. Recall that the discount rate is a firm's cost of capital. If cost of capital is not accurate, discounting may not produce accurate results or current conditions may warrant a higher discount rate because of increased risk. Calculation of cost of capital is a topic reserved for later. In summary, United tasked Hampton to decide among competing alternatives. Hampton used various capital budgeting techniques to make an informed decision. Capital budgeting entails deciding on an alternative or project that adds the most value to the firm. NPV is the preferred capital budgeting method because it offers the best result in deciding among alternatives and projects that add the most value to the firm. In the case of independent projects, all that a firm needs to accept a project is a positive NPV. IRR, and PI can result in conflicting results that do not provide accurate outcomes. Learning Activities (Nongraded) The following video tutorials will help you with the concepts covered in the textbook chapters. It is strongly encouraged to watch these videos prior to starting the unit assessment. Click here for Capital Budgeting Click here for Checkpoint 11.1: Calculating NPV Click here for Checkpoint 11.2: Calculating NPV Click here for Checkpoint 11.3: Calculating PI Click here for Checkpoint 11.4: Calculating IRR Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. BBA 3301, Financial Management 4 ...
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chemtai
School: UC Berkeley

please find the attached file. i look forward to working with you again. good bye

BBA 3301 Unit VIIAssignment
Instructions: Enter all answers directly in this worksheet. When finished select Save As, and save this
document using your last name and student ID as the file name. Upload the data sheet to Blackboard as
a .doc,.docx or .rtf file when you are finished.
Question 1: (10 points). (Net present value calculation) Dowling Sportswear is considering building a new
factory to produce aluminum baseball bats. This project would require an initial cash outlay of $4,000,000
and would generate annual net cash inflows of $900,000 per year for 7 years. Calculate the project's NPV
using a discount rate of 5 percent. (Round to the nearest dollar.)
NPV=$900,000 X {(1-(1+0.05)-7)/0.05}-$4,000,000
a. If the discount rate is 5 percent, then the project's NPV is: $ 1,150,225

Question 2: (30 points).(Net present value calculation) Big Steve's, makers of swizzle sticks, is
considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of
$90,000 and will generate net cash inflows of $19,000 per year f...

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Anonymous
Excellent job

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