balance sheet is $10‚000 in year 0‚ $12‚000 in year 1‚ $16‚000 in year 2 till the end of year 4. The working capital will be released at the end of the project. The marginal tax rate is 35% and the discount rate is 10%. a. Please calculate the NPV of the project? b. Please calculate the IRR of the project? c. Should KC buy the machine? 3. Hasnain’s Fashions can invest $6 million in a new plant for producing invisible makeup. The plant has an expected life of 5 years‚ and expected
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attractiveness of the investment based on net present value (NPV) and the internal rate of return (IRR) of the discounted cash flows (DCF). Further‚ the student will have the opportunity to interpret those results and to test those measures’ sensitivity to variability in the base case. This case was prepared with the following objectives in mind. • Apply DCF analysis to an either/or capital investment decision. • Interpret the NPV and IRR results. • Exercise a sensitivity analysis to determine
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sensitive to cost changes. NPV and IRR remains’ positive for all options of sensitivity analysis. Table 1. Sensitivity analysis (000 ’s) 2% (-2%) 4% 7% (+3%) 10% (6%) NPV IRR NPV IRR NPV IRR NPV IRR Gas $3‚302.70 34% $3‚772.49 35% $4‚577.42 38% $5‚521.53 40% Battery $2‚574.25 28% $3‚004.41 30% $2‚574.25 32% $4‚605.90 35% Bio Diesel $2‚812.34 29% $3‚249.17 31% $3‚997.59 33% $4‚875.44 36% The key findings are that when using the NPV model to evaluate the
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option expires‚ the less valuable the option will be‚ other things held constant. ____ 9. If a project’s NPV exceeds its IRR‚ then the project should be accepted. ____ 10. The NPV method’s assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR’s assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method. Multiple Choice Identify the choice that best completes
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Solutions Manual Fundamentals of Corporate Finance 9th edition Ross‚ Westerfield‚ and Jordan Updated 12-20-2008 CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE Answers to Concepts Review and Critical Thinking Questions 1. Capital budgeting (deciding whether to expand a manufacturing plant)‚ capital structure (deciding whether to issue new equity and use the proceeds to retire outstanding debt)‚ and working capital management (modifying the firm’s credit collection policy with its customers). Disadvantages:
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3530 F10 Final Exam and Solutions - Type A 1. Two years ago Zippy Inc. issued a zero-coupon bond with a $1‚000 face value and a ten year maturity. If the bond’s yield to maturity today is 3.50%‚ what is the current price of the bond? (assume annual compounding) A) $708.92 B) $759.42 C) $825.50 D) $933.51 E) $1000 Solution B PV of bond = 1000/(1.035)^8 = $759.41 2. Topaz Bank’s earnings and dividends are expected to grow at a rate of 10% during the next 2 years‚ at 8% in the third year‚ and at a constant
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A proposal to extend the ABC Gas Company Ltd’s gas distribution network to the NOIDA industrial cluster‚ about 40 km east of Delhi‚ at distance of about 20 kms from the ABC’s existing transmission line‚ is under the consideration of its CEO‚ Prerna Goyal. The NOIDA industrial cluster is dominated by the textiles industry including texturising‚ weaving‚ spinning and yarn units with over 2‚500 small and medium size units. The potential of gas consumption in these industries is mainly on account of
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D. 1. 2. 3. 4. 5. 6. INVESTMENT APPRAISAL The nature of investment decisions and the appraisal process Non-discounted cash flow techniques Discounted cash flow techniques Allowing for inflation and taxation in DCF Adjusting for risk and uncertainty in investment appraisal Specific investment decisions (lease or buy; asset replacement‚ capital rationing) The Nature of Investment Decisions and the Appraisal Process What is an investment? An investment is any expenditure in the expectation of
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Tasty Foods Case Summary (Roxana): Tasty Foods Corporation was founded in 1995 by Henry Abercrombie. The corporation is a food conglomerate that has major product lines including cereals‚ frozen dinners‚ canned sodas and fruit juices. Abercrombie founded the company with a small inheritance and with the idea of producing instant hot cereal. The firm’s hot cereal proved to be a success and was well accepted by the consumers. Over the years it grew by its acquisitions and product innovation ideas
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CHAPTER 10 Cash Flows and Other Topics in Capital Budgeting ANSWERS TO END-OF-CHAPTER QUESTIONS 10-1. We focus on cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. Only by examining cash flows are we able to correctly analyze the timing of the benefit or cost. Also‚ we are only interested in these cash flows on an after tax basis as only those flows are available to the shareholder. In addition‚ it is only the incremental
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