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ABC Chemicals manufacturers detergent in their three plants situated in Delhi, Bombay and Kolkata with capacities of 75,65 and 70 tonnes of detergent.
What factors should a company consider when it decides whether to invest in a project today or to wait until more information becomes available?
Nixon Communications is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project.
If you were told that each project’s cost of capital was 10 percent, which project should be selected?
The Ewert Exploration Company is considering two mutually exclusive plans for extracting oil on property for which it has mineral rights.
Set up a Project ? by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant.
Can you think of some other capital budgeting situations where negative cash flows during or at the end of the project’s life might lead to multiple IRRs?
Shao Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows.
The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future.
Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included.
Explain how net operating working capital is recovered at the end of a project’s life, and why it is included in a capital budgeting analysis.
The company’s tax rate is 40 percent. What is the project’s initial investment outlay?
Carter Air Lines is now in the terminal year of a project. The equipment originally cost $20 million, of which 80 percent has been depreciated.
The Campbell Company is evaluating the proposed acquisition of a new milling machine.
You have been asked by the president of your company to evaluate the proposed acquisition of a new spectrometer for the firm’s R&D department.
The tax rate is 40 percent. If the flotation cost is 2 percent of the issue proceeds, what is the after-tax cost of debt?
How is it possible for an employee stock option to be valuable even if the firm’s stock price fails to meet shareholders’ expectations?
You are given the following forecasted information for the year 2010: Sales = $300,000,000; Operating profitability (OP) = 6%; Capital requirements (CR).
How is a project classification scheme (for example, replacement, expansion into new markets, and so forth) used in the capital budgeting process?
Explain why, if two mutually exclusive projects are being compared, the shortterm project might have the higher ranking.
In what sense is a reinvestment rate assumption embodied in the NPV, IRR, and MIRR methods? What is the assumed reinvestment rate of each method?
How much new, long-term debt financing will be needed in 2007? (Hint: AFN - New stock = New long-term debt.) Do not consider any financing feedback effects.
Distinguish between beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a potential project.
The yield to maturity on the company’s outstanding bonds is 9 percent, and the company’s tax rate is 40 percent.
The issue is expected to pay a constant annual dividend of $3.80 a share. The flotation cost on the issue is estimated to be 5 percent.