(1) The Tiger Company has an opportunity to make an investment with the following estimated after tax cash flows:-
Year ATCE
0 -10,000,000
1 2,000,000
2 2,000,000
3 2,500,000
4 3,500,000
5 600,000
6 5,000,000
The company's required rate of return on such investments id 10%.
(A) Calculate payback period, internal rate of return (IRR), net present value (NPV), and profitability index (PI) for this investment? (SHOW ALL YOUR WORK).
(B) What is the IRR, and what is its relationship to the NPV and the PI?
(C) Which of the two approaches present value or future value does a financial manager rely on most often? Why?
(2) Two mutually exclusive projects have projected cash flows as follows:
|
Years
|
Project A
|
Project B
|
|
0
|
-800
|
-800
|
|
1
|
400
|
0
|
|
2
|
400
|
0
|
|
3
|
400
|
1324
|
(a) Compute the net present value of each project at a discount rate of 10%.
(b) Compute the internal rate of return for each project.
(c) Graphically illustrate the present value profile of the two projects.
(d) Which project would you select? Why? What assumptions are inherent in your decision?
(3) The Buccaneer Corporation is considering replacement of its old, fully depreciated computer. Two new models are available. Computer A has a cost of $108,300 a five years expected life, and after tax cash flows (labor savings) of $29,100 per year. Computer B has a cost of $172,000, a ten-year life, and after tax cash flows of $31,700 per year. No new technological developments are expected, but computer prices are falling because of competition from imports. In five years, computer prices are expected to be 25% less than current prices. The cost of capital is 12%. If the replacement is to be made, it must be done now. Should the company make the replacement, and if so, with A or B? Why?
(i) Draw cash flow time lines for Computer A and Computer B.
(ii) Calculate the NPV's on Computer A and Computer B.
(iii) On the basis of their respective NPV's should the company invest in Computer A or Computer B?
(v) Is there anything that you can identify that may cause some difficulty in making this decision based on the Internal Rates of Return (IRR'S0.
(4) On completion of MBA, Eddie and Mike were so pleased with the amount of useful and interesting knowledge that they had learned that they convinced some friends who are wealthy alums to create a scholarship. The scholarship will allow three needy students to take the courses in perpetuity. The annual cost of tuition and books for the course is $2000. The university will earn 6% on the fund. The scholarship will be created by a single payment to the university from their friends.
A- How large must the payment be to fund the scholarship?
B- What amount would be needed if the university could earn 9% rather than 6% per year on the funds?
(5) The Bulldog Company can purchase a Tractor for a $14,000 initial investment. The tractor will generate annual after-tax cash inflows of $4, 000 for the next 4 years.
A- What is the Net Present Value (NPV) of the asset if the company's required rate of return on such assets is 10%?
B- What would the maximum required rate of return (closet whole-percentage rate) that the firm can have and still accept the asset? Discuss this finding in light of your response to A. above.