FIN325, Session 9&10 Problems 1. You are considering two independent projects, project A and project B. The initial cash

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Fin325 Session 9 10 Problems 1 You Are Considering Two Independent Projects Project A And Project B The Initial Cash 1 (118.99 KiB) Viewed 33 times

FIN325, Session 9&10 Problems 1. You are considering two independent projects, project A and project B. The initial cash outlay associated with both projects is $50,000. The required rate of return on both projects is 10 percent. The expected annual free cash inflows from each project are as follows: PROJECT X PROJECT Y Initial outlay $50,000 -$50,000 Inflow year 1 12,000 18,000 Inflow year 2 12,000 18,000 Inflow year 3 12,000 18,000 Inflow year 4 36,000 18,000 Calculate the Payback, Discounted Payback, NPV, PI, IRR and MIRR for each project and indicate if the project should be accepted. 2. Trans Euro Plc is considering the purchase of a new machine. It has identified two possible machines with initial costs and expected cash savings per year as follows: со С. C2 C C4 Machine A -100,000 45,000 35,000 60,000 Machine B -100,000 95,000 15,000 16,000 10,000 Machine A has a useful life of 3 years while machine B has a useful life of 4 years. Neither of these machines have any residual value at the end of their lives. The company will only purchase one of the machines. The opportunity cost of capital for TransEuro Plc is 10% per year. If TransEuro Plc is going to replace the chosen machine each time when it reaches the end of its useful life, which machine would you recommend the management to invest? 3. The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $12 million. The projects are independent and have the following costs and profitability indexes associated with them: a. Under strict capital rationing, which projects should be selected? b. What problems are there with capital rationing? PROJECT PROFITABILITY INDEX 1.18 A B 1.08 с 1.33 COST $4,000,000 3,000,000 5,000,000 6,000,000 4,000,000 6,000,000 4,000,000 D 1.31 1.19 E F 1.20 G 1.18