Ch 6. Questions for Review and Discussion
6. How should governments report their capital projects and debt service activities in their government-wide statements?
Click here for the solution: How should governments report their capital projects and debt service activities in their government-wide statements?
Showing posts with label projects. Show all posts
Showing posts with label projects. Show all posts
Monday, April 18, 2016
Friday, September 25, 2015
Summer Company is considering three capital expenditure projects
E12-5 Summer Company is considering three capital expenditure projects. Relevant data for the projects are as follows.
Project Investment Annual Income Life of Project
22A $240,000 $15,000 6 years
23A 270,000 24,400 9 years
24A 280,000 21,000 7 years
Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Summer Company uses the straight-line method of depreciation.
Instructions
(a) Determine the internal rate of return for each project. Round the internal rate of return factor to three decimals.
(b) If Summer Company's required rate of return is 11%, which projects are acceptable?
Click here for the solution: Summer Company is considering three capital expenditure projects
Project Investment Annual Income Life of Project
22A $240,000 $15,000 6 years
23A 270,000 24,400 9 years
24A 280,000 21,000 7 years
Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Summer Company uses the straight-line method of depreciation.
Instructions
(a) Determine the internal rate of return for each project. Round the internal rate of return factor to three decimals.
(b) If Summer Company's required rate of return is 11%, which projects are acceptable?
Click here for the solution: Summer Company is considering three capital expenditure projects
Wednesday, September 23, 2015
Be You Apparel Inc. is considering two investment projects
Be You Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows:
Each project requires an investment of $480,000. A rate of 15% has been selected for the net present value analysis.
Present Value of $1 at Compound Interest
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 0.890 0.826 0.797 0.756 0.694
3 0.840 0.751 0.712 0.658 0.579
4 0.792 0.683 0.636 0.572 0.482
5 0.747 0.621 0.567 0.497 0.402
6 0.705 0.564 0.507 0.432 0.335
7 0.665 0.513 0.452 0.376 0.279
8 0.627 0.467 0.404 0.327 0.233
9 0.592 0.424 0.361 0.284 0.194
10 0.558 0.386 0.322 0.247 0.162
1. a. Compute the cash payback period for each project.
b. Compute the net present value. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.
2. Prepare a brief report advising management on the relative merits of each project. The input in the box below will not be graded, but may be reviewed and considered by your instructor.
Click here for the solution: Be You Apparel Inc. is considering two investment projects
Each project requires an investment of $480,000. A rate of 15% has been selected for the net present value analysis.
Present Value of $1 at Compound Interest
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 0.890 0.826 0.797 0.756 0.694
3 0.840 0.751 0.712 0.658 0.579
4 0.792 0.683 0.636 0.572 0.482
5 0.747 0.621 0.567 0.497 0.402
6 0.705 0.564 0.507 0.432 0.335
7 0.665 0.513 0.452 0.376 0.279
8 0.627 0.467 0.404 0.327 0.233
9 0.592 0.424 0.361 0.284 0.194
10 0.558 0.386 0.322 0.247 0.162
1. a. Compute the cash payback period for each project.
b. Compute the net present value. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.
2. Prepare a brief report advising management on the relative merits of each project. The input in the box below will not be graded, but may be reviewed and considered by your instructor.
Click here for the solution: Be You Apparel Inc. is considering two investment projects
Saturday, August 22, 2015
(Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects
(Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects, A through E, using the capital asset pricing model (CAPM) and its graphical representation, the security market line (SML). Relevant information is presented in the following table.
Item Rate of return Beta,b
Risk-free asset 9% 0.00
Market portfolio 14 1.00
Project A __ 1.50
Project B ___ 0.75
Project C ___ 2.00
Project D ___ 0.00
Project E ___ -0.50
a. Calculate (1) the required rate of return and (2) the risk premium for each project, given its level of nondiversifiable risk.
b. Use your findings in part a to draw the security, market line (required return relative to nondiversifiable risk).
c. Discuss the relative nondiversifiable risk of projects A through E
d. Assume that recent economic events have caused investors to become less risk- averse, causing the market return to decline by 2%, to 12%. Calculate the new required returns for assets A through E, and draw the new security market line on the same set of axes that you used in part b.
e. Compare your findings in part a and b with those in part d. What conclusion can you draw about the impact of a decline in investor risk aversion on the required returns of risky assets?
Click here for the solution: (Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects
Item Rate of return Beta,b
Risk-free asset 9% 0.00
Market portfolio 14 1.00
Project A __ 1.50
Project B ___ 0.75
Project C ___ 2.00
Project D ___ 0.00
Project E ___ -0.50
a. Calculate (1) the required rate of return and (2) the risk premium for each project, given its level of nondiversifiable risk.
b. Use your findings in part a to draw the security, market line (required return relative to nondiversifiable risk).
c. Discuss the relative nondiversifiable risk of projects A through E
d. Assume that recent economic events have caused investors to become less risk- averse, causing the market return to decline by 2%, to 12%. Calculate the new required returns for assets A through E, and draw the new security market line on the same set of axes that you used in part b.
e. Compare your findings in part a and b with those in part d. What conclusion can you draw about the impact of a decline in investor risk aversion on the required returns of risky assets?
Click here for the solution: (Integrative-Risk, return, and CAPM) Wolff Enterprises must consider several investment projects
Thursday, August 13, 2015
Valley Corporation is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5 million
Valley Corporation is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5 million. The firm recognizes that any unused portion of this budget will learn than its 15% cost of capital, thereby resulting in a present value of inflows that is less than the initial investment. The firm has summarized, in the following table, the key data to be used in selecting the best group projects.
Project Initial Investment IRR Present Value of inflows at 15%
A $5,000,000 17% $5,400,000
B 800,000 18 1,100,000
C 2,000,000 19 2,300,000
D 1,500,000 16 1,600,000
E 800,000 22 900,000
F 2,500,000 23 3,000,000
G 1,200,000 20 1,300,000
a. Use the internal rate of return (IRR) approach to select the best group of projects.
b. Use the net present value (NPV) approach to select the best group of projects.
c. Compare, contrast, and discuss your findings in parts a and b.
d. Which projects should the firm implement? Why?
Click here for the solution: Valley Corporation is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5 million
Project Initial Investment IRR Present Value of inflows at 15%
A $5,000,000 17% $5,400,000
B 800,000 18 1,100,000
C 2,000,000 19 2,300,000
D 1,500,000 16 1,600,000
E 800,000 22 900,000
F 2,500,000 23 3,000,000
G 1,200,000 20 1,300,000
a. Use the internal rate of return (IRR) approach to select the best group of projects.
b. Use the net present value (NPV) approach to select the best group of projects.
c. Compare, contrast, and discuss your findings in parts a and b.
d. Which projects should the firm implement? Why?
Click here for the solution: Valley Corporation is attempting to select the best of a group of independent projects competing for the firm’s fixed capital budget of $4.5 million
Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity
Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table.
Project A Project B
Initial Investment(CF) $80,000 $50,000
Year Cash Inflows(CF)
1 15,000 15,000
2 20,000 15,000
3 25,000 15,000
4 30,000 15,000
5 35,000 15,000
a. Calculate each project's payback period
b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.
Click here for the solution: Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity
Project A Project B
Initial Investment(CF) $80,000 $50,000
Year Cash Inflows(CF)
1 15,000 15,000
2 20,000 15,000
3 25,000 15,000
4 30,000 15,000
5 35,000 15,000
a. Calculate each project's payback period
b. Calculate the net present value (NPV) for each project.
c. Calculate the internal rate of return (IRR) for each project.
d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.
Click here for the solution: Mutually exclusive projects Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity
Cooper Electronics uses NPV profiles to visually evaluate competing projects
Cooper Electronics uses NPV profiles to visually evaluate competing projects. Key data for the two projects under consideration are given in the following table. Using these data, graph, on the same set of axes, the NPV profiles for each project using discount rates of 0%, 8%, and the IRR.
Terra Firma
$30,000 $25,000
Initial Investment
Year Operating cash inflows
1 $7000 $6,000
2 10,000 9,000
3 12,000 9,000
4 10,000 8,000
Click here for the solution: Cooper Electronics uses NPV profiles to visually evaluate competing projects
Terra Firma
$30,000 $25,000
Initial Investment
Year Operating cash inflows
1 $7000 $6,000
2 10,000 9,000
3 12,000 9,000
4 10,000 8,000
Click here for the solution: Cooper Electronics uses NPV profiles to visually evaluate competing projects
Billabong Tech uses the internal rate of return (IRR) to select projects
Billabong Tech uses the internal rate of return (IRR) to select projects. Calculate the IRR for each of the following projects and recommend the best project based on this measure. Project T-Shirt requires an initial investment of $15,000 and generates cash inflows of $8,000 per year for 4 years. Project Board Shorts requires an initial investment of $25,000 and produces cash inflows of $12,000 per year for 5 years.
Click here for the solution: Billabong Tech uses the internal rate of return (IRR) to select projects
Click here for the solution: Billabong Tech uses the internal rate of return (IRR) to select projects
Axis Corp. is considering investment in the best of two mutually exclusive projects
Axis Corp. is considering investment in the best of two mutually exclusive projects. Project Kelvin involves an overhaul of the existing system; it will cost $45,000 and generate cash inflows of $20,000 per year for the next 3 years. Project Thompson involves replacement of the existing system; it will cost $275,000 and generate cash inflows of $60,000 per year for 6 years. Using an 8% cost of capital, calculate each project's NPV, and make a recommendation based on your findings.
Click here for the solution: Axis Corp. is considering investment in the best of two mutually exclusive projects
Click here for the solution: Axis Corp. is considering investment in the best of two mutually exclusive projects
Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects
Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects. Project Hydrogen requires an initial outlay of $25,000; project Helium requires an initial outlay of $35,000. Using the expected cash inflows given for each project in the following table, calculate each project's payback period. Which project meets Elysian's standards?
Expected cash inflows
Year Hydrogen Helium
1 $6000 $7000
2 6,000 7,000
3 8,000 8,000
4 4,000 5,000
5 3,500 5,000
6 2,000 4,000
Click here for the solution: Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects
Expected cash inflows
Year Hydrogen Helium
1 $6000 $7000
2 6,000 7,000
3 8,000 8,000
4 4,000 5,000
5 3,500 5,000
6 2,000 4,000
Click here for the solution: Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects
Monday, July 6, 2015
The management of Pacific Utilities Inc. is considering two capital investment projects
The management of Pacific Utilities Inc. is considering two capital investment projects. The estimated net cash flows from each project are as follows:
The generating unit requires an investment of $1,172,900, while the distribution network expansion requires an investment of $850,360. No residual value is expected from either project.
Required:
1a. Compute the net present value for each project. Use a rate of 6% and the present value of an annuity of $1 in above table. If required, round to the nearest dollar.
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
2. Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1 and (b) using the present value of an annuity of $1 in above table. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.
3. What advantage does the internal rate of return method have over the net present value method in comparing projects?
Click here for the solution: The management of Pacific Utilities Inc. is considering two capital investment projects
The generating unit requires an investment of $1,172,900, while the distribution network expansion requires an investment of $850,360. No residual value is expected from either project.
Required:
1a. Compute the net present value for each project. Use a rate of 6% and the present value of an annuity of $1 in above table. If required, round to the nearest dollar.
1b. Compute a present value index for each project. If required, round your answers to two decimal places.
2. Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1 and (b) using the present value of an annuity of $1 in above table. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest percent.
3. What advantage does the internal rate of return method have over the net present value method in comparing projects?
Click here for the solution: The management of Pacific Utilities Inc. is considering two capital investment projects
Saturday, June 27, 2015
Tulley Appliances Inc. projects next years sales to be $20 million
Tulley Appliances Inc. projects next years sales to be $20 million.
Current sales are $15 million, based on current assets of $5 million and
fixed assets of $5 million. The firms net profit margin is 5% after
taxes. Tulley forecasts that its current assets will rise in direct
proportion to the increase in sales, but that its fixed assets will
increase by only $100,000. Currently, Tulley has $1.5 million in
accounts payable (which varies directly with sales), $2 million in long
term debt (due in 10 years), and common equity (including $4 million in
retained earnings) totaling $6.5 million. Tulley plans to pay $500,000
in common stock dividends next year.
A) What are Tulley's total financing needs? (i.e. total assets) for the coming year?
B) Given the firm's projections and dividend payment plans, what are its discretionary financing needs?
C) Based on your projections, and assuming that the $100,000 expansion in fixed assets will occur, what is the largest increase in sales the firm can support without having to resort to the use of discretionary sources of financing?
Click here for the solution: Tulley Appliances Inc. projects next years sales to be $20 million
A) What are Tulley's total financing needs? (i.e. total assets) for the coming year?
B) Given the firm's projections and dividend payment plans, what are its discretionary financing needs?
C) Based on your projections, and assuming that the $100,000 expansion in fixed assets will occur, what is the largest increase in sales the firm can support without having to resort to the use of discretionary sources of financing?
Click here for the solution: Tulley Appliances Inc. projects next years sales to be $20 million
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