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FIN 534 Week 8 Homework Set 4

FIN 534 Week 8 Homework Set 4 Purchase here https://sellfy.com/p/TOTQ Product Description Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points. Use the following information for Questions 1 through 5: Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows: EXPECTED NET CASH FLOWS: Year Project A Project B 0 −$400 −$650 1 −528 210 2 −219 210 3 −150 210 4 1,100 210 5 820 210 6 990 210 7 −325 210 1. Construct NPV profiles for Projects A and B. 2. What is each project’s IRR? 3. If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice? 4. What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.) 5. What is the crossover rate, and what is its significance? Use the following information for Questions 6 through 8: The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process: Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter’s cost of capital for an average-risk project is 10%. Net After-Tax Cash Flows Year P = 0.2 P = 0.6 P = 0.2 0 −$100,000 −$100,000 −$100,000 1 20,000 30,000 40,000 2 20,000 30,000 40,000 3 20,000 30,000 40,000 4 20,000 30,000 40,000 5 20,000 30,000 40,000 5* 0 20,000 30,000 6. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected values for the net cash flow in each year.) 7. Find the best-case and worst-case NPVs. What is the probability of occurrence of the worst case if the cash flows are perfectly dependent (perfectly positively correlated) over time? 8. Assume that all the cash flows are perfectly positively correlated. That is, assume there are only three possible cash flow streams over time—the worst case, the most likely (or base) case, and the best case—with respective probabilities of 0.2, 0.6, and 0.2. These cases are represented by each of the columns in the table. Find the expected NPV, its standard deviation, and its coefficient of variation for each probability. Use the following information for Question 9: At year-end 2013, Wallace Landscaping’s total assets were $2.17 million and its accounts payable were $560,000. Sales, which in 2013 were $3.5 million, are expected to increase by 35% in 2014. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $625,000 in 2013, and retained earnings were $395,000. Wallace has arranged to sell $195,000 of new common stock in 2014 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2014. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of earnings will be paid out as dividends.

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140 views7 pages

FIN 534 Week 8 Homework Set 4

FIN 534 Week 8 Homework Set 4 Purchase here https://sellfy.com/p/TOTQ Product Description Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points. Use the following information for Questions 1 through 5: Assume you are presented with the following mutually exclusive investments whose expected net cash flows are as follows: EXPECTED NET CASH FLOWS: Year Project A Project B 0 −$400 −$650 1 −528 210 2 −219 210 3 −150 210 4 1,100 210 5 820 210 6 990 210 7 −325 210 1. Construct NPV profiles for Projects A and B. 2. What is each project’s IRR? 3. If each project’s cost of capital were 10%, which project, if either, should be selected? If the cost of capital were 17%, what would be the proper choice? 4. What is each project’s MIRR at the cost of capital of 10%? At 17%? (Hint: Consider Period 7 as the end of Project B’s life.) 5. What is the crossover rate, and what is its significance? Use the following information for Questions 6 through 8: The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for a new manufacturing process: Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the estimated salvage values. Porter’s cost of capital for an average-risk project is 10%. Net After-Tax Cash Flows Year P = 0.2 P = 0.6 P = 0.2 0 −$100,000 −$100,000 −$100,000 1 20,000 30,000 40,000 2 20,000 30,000 40,000 3 20,000 30,000 40,000 4 20,000 30,000 40,000 5 20,000 30,000 40,000 5* 0 20,000 30,000 6. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected values for the net cash flow in each year.) 7. Find the best-case and worst-case NPVs. What is the probability of occurrence of the worst case if the cash flows are perfectly dependent (perfectly positively correlated) over time? 8. Assume that all the cash flows are perfectly positively correlated. That is, assume there are only three possible cash flow streams over time—the worst case, the most likely (or base) case, and the best case—with respective probabilities of 0.2, 0.6, and 0.2. These cases are represented by each of the columns in the table. Find the expected NPV, its standard deviation, and its coefficient of variation for each probability. Use the following information for Question 9: At year-end 2013, Wallace Landscaping’s total assets were $2.17 million and its accounts payable were $560,000. Sales, which in 2013 were $3.5 million, are expected to increase by 35% in 2014. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $625,000 in 2013, and retained earnings were $395,000. Wallace has arranged to sell $195,000 of new common stock in 2014 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2014. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of earnings will be paid out as dividends.

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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FIN 534 Week 8 Homework Set 4

Purchase here

https://sellfy.com/p/TOTQ

Product Description

Directions: Answer the following questions on a


separate document. Explain how you reached the
answer or show your work if a mathematical
calculation is needed, or both. Submit your
assignment using the assignment link in the course
shell. This homework assignment is worth 100
points.

Use the following information for Questions 1


through 5:

Assume you are presented with the following


mutually exclusive investments whose expected net
cash flows are as follows:

EXPECTED NET CASH FLOWS:


Year Project A Project B
0 $400 $650
1 528 210
2 219 210
3 150 210
4 1,100 210

5 820 210
6 990 210
7 325 210

1. Construct NPV profiles for Projects A and B.


2. What is each projects IRR?
3. If each projects cost of capital were 10%, which
project, if either, should be selected? If the cost of
capital were 17%, what would be the proper choice?
4. What is each projects MIRR at the cost of capital
of 10%? At 17%? (Hint: Consider Period 7 as the
end of Project Bs life.)

5. What is the crossover rate, and what is its


significance?
Use the following information for Questions 6
through 8:

The staff of Porter Manufacturing has estimated the


following net after-tax cash flows and probabilities for
a new manufacturing process:

Line 0 gives the cost of the process, Lines 1 through


5 give operating cash flows, and Line 5* contains the
estimated salvage values. Porters cost of capital for
an average-risk project is 10%.

Net After-Tax Cash Flows


Year P = 0.2 P = 0.6 P = 0.2
0 $100,000 $100,000 $100,000
1 20,000 30,000 40,000
2 20,000 30,000 40,000
3 20,000 30,000 40,000
4 20,000 30,000 40,000
5 20,000 30,000 40,000
5* 0 20,000 30,000
6. Assume that the project has average risk. Find the
projects expected NPV. (Hint: Use expected values
for the net cash flow in each year.)
7. Find the best-case and worst-case NPVs. What is
the probability of occurrence of the worst case if the
cash flows are perfectly dependent (perfectly

positively correlated) over time?


8. Assume that all the cash flows are perfectly
positively correlated. That is, assume there are only
three possible cash flow streams over timethe
worst case, the most likely (or base) case, and the
best casewith respective probabilities of 0.2, 0.6,
and 0.2. These cases are represented by each of the
columns in the table. Find the expected NPV, its
standard deviation, and its coefficient of variation for
each probability.

Use the following information for Question 9:

At year-end 2013, Wallace Landscapings total

assets were $2.17 million and its accounts payable


were $560,000. Sales, which in 2013 were $3.5
million, are expected to increase by 35% in 2014.
Total assets and accounts payable are proportional
to sales, and that relationship will be maintained.
Wallace typically uses no current liabilities other than
accounts payable. Common stock amounted to
$625,000 in 2013, and retained earnings were
$395,000. Wallace has arranged to sell $195,000 of
new common stock in 2014 to meet some of its
financing needs. The remainder of its financing
needs will be met by issuing new long-term debt at
the end of 2014. (Because the debt is added at the
end of the year, there will be no additional interest
expense due to the new debt.) Its net profit margin
on sales is 5%, and 45% of earnings will be paid out
as dividends.

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