Problems -
I. Renewable Energy, Inc. is considering investing in two projects: Solar Park or Wind Farm. Setup of the solar park will cost $20 million and will generate $7.5 million after-tax cash flows per annum for 5 years. The wind farm will cost $35 million and will generate $8 million for 10 years. If the company's cost of capital is 10%, determine which project should the company invest in? Assume the need for these projects is perpetual.
II) Two projects have the expected cash flows shown below. The projects have similar risk characteristics and their cost of capital is 12 percent.
|
Expected Cash Flows
|
|
End of Year
|
Project A
|
Project B
|
|
Now
|
$(4,000,000)
|
$(4,000,000)
|
|
1
|
500,000
|
2,800,000
|
|
2
|
2,400,000
|
2,100,000
|
|
3
|
3,000,000
|
700,000
|
a. Calculate the NPV of each project. According to the NPV rule, which project should be accepted if they are independent? If they are mutually exclusive?
b. Calculate the IRR of each project. Which project should be accepted if they are independent? If they are mutually exclusive?
c. If the projects are mutually exclusive, what is the crossover rate?
d. In what range of cost of capital is there a conflict between IRR and NPV criteria?
III) Rocky Mountain Lumber, Inc. is considering a purchasing a new wood saw that costs $50,000. The saw will generate revenues $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, and other cash expenses will be $10,000 per year. The machine is expected to sell for $1,000 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. Rocky Mountain's tax rate is 34 percent, and its opportunity cost of capital is 10 percent. Should the company purchase the saw?
IV) You have been hired as a capital budgeting analyst by a sporting good firm that manufactures athletic shoes and has captured 10% of the overall shoe market. (The total market value is worth $100 million a year). The fixed costs associated with manufacturing these shoes is $2 million a year, and variable costs are 40% of the revenues. The company's tax rate is 40%. The firm believes that it can increase its market share to 20% by investing $10 million in a new distribution system (which can be depreciated over the system's life of 10 years to a salvage value of zero) and spending $1 million a year on additional advertising. The company proposes to continue to maintain working capital at 10% of annual revenues. The discount rate used for this project is 8%.
a) What is the initial investment for this project?
b) What is the annual operating cash flow from this project?
c) What is the NPV of this project?
V) XYZ company wants to maintain a growth rate of 7 percent per year and a debt-equity ratio of 0.50. Profit margin is 8 percent and the ratio of total assets to sales is constant 1.0. What should be the dividend payout ratio to maintain this growth?
VI) Carolyn Shaw is 27 and works as an accountant for an oil company. Her salary next year will be $40,000 and she expects to receive a 5 percent raise each year until she retires at age of 65. Carolyn is considering a return to school to pursue an MBA degree. She expects the cost of books, tuition, and fees to be $21,000 the first year and $23,000 the second. These costs are paid at the beginning of the year (as you surely know). She will not work while in school. Graduates of the school Carolyn is considering receive starting salaries that average $60,000. Raises average 7 percent per year. Carolyn considers the opportunity costs to be 12 percent.
a) Determine the present value of Carolyn's lifetime earnings if she does not return to school.
b) Determine the present value of Carolyn's lifetime earnings with an MBA degree. Remember, she won't start her job for two years.
Any work that is done in excel can I get a copy of the excel work.