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Due by Nov 6, 2014 3pm in The TA Room Faculty Block I Please Hand It Over To Arun

This document contains 5 questions related to capital budgeting techniques for an assignment due on November 6th, 2014. The first question involves calculating the internal rate of return for a shipbuilding company's project to determine if they should work an extra shift to speed up construction. The second question involves selecting projects from a list that stay within a $1 million budget limit and calculating the opportunity cost. The third question involves calculating the payback period, discounted payback period, and net present value for a perpetual construction project. The last two questions reference problems from a textbook.

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Rahul More
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69 views1 page

Due by Nov 6, 2014 3pm in The TA Room Faculty Block I Please Hand It Over To Arun

This document contains 5 questions related to capital budgeting techniques for an assignment due on November 6th, 2014. The first question involves calculating the internal rate of return for a shipbuilding company's project to determine if they should work an extra shift to speed up construction. The second question involves selecting projects from a list that stay within a $1 million budget limit and calculating the opportunity cost. The third question involves calculating the payback period, discounted payback period, and net present value for a perpetual construction project. The last two questions reference problems from a textbook.

Uploaded by

Rahul More
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Assignment: Capital Budgeting techiques

Due by Nov 6, 2014 3pm in the TA room faculty block I


Please hand it over to Arun
Q1
The Titanic Shipbuilding Company has a non-cancelable contract to build a small cargo vessel.
Construction involves a cash outlay of $250,000 at the end of each of the next two years. At the
end of the third year the company will receive payment of $650,000. The company can speed up
construction by working an extra shift. In this case there will be a cash outlay of $550,000 at the
end of the first year followed by a cash payment of $650,000 at the end of the second year. Use
the IRR rule to show the (approximate) range of opportunity costs of capital at which the
company should work the extra shift.
Q2
Borghia Pharmaceuticals has $1 million allocated for capital expenditures. Which of the
following projects should the company accept to stay within the $1 million budget? How much
does the budget limit cost the company in terms of its market value? The opportunity cost of
capital for each project is 11%.
Project
1
2
3
4
5
6
7

Investment
($ thousands)
300
200
250
100
100
350
400

NPV
($ thousands)
66
-4
43
14
7
63
48

IRR (%)
17.2
10.7
16.6
12.1
11.8
18.0
13.5

Q3
Suppose Peach Paving Company invests $1 million today on a new construction project. The
project will generate annual cash flows of $150,000 in perpetuity. The appropriate annual
discount rate for the project is 10 percent.
a. What is the payback period for the project? If the Peach Paving Company desires to have
a 10 year payback period, should the project be adopted?
b. What is the discounted payback period for the projects?
c. What is the NPV of the project?
Q4
Ross Westerfield Jaffe - Chapter 5: # 12
Q5
Ross Westerfield Jaffe - Chapter 5: # 14

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