Question.1- For this question I only need the answer to b. a.

Find the present values of the following cash flow streams. The appropriate interest rate is 8% Year Cash Stream A Cash Stream B 1 $100 & nbsp; $300 2 400 400 3 400 400 4 400 400 5 300 100 PV for cash stream A = $1,251.29; PV for cash stream B = $1,300.31 b. What is the value of each cash flow stream at a 0 % interest rate? PV for cash stream A = $1,600; PV for cash stream B = $1,600 Question 2. If a typical firm reports $20 million of retained earnings on its balance sheet, could its directors declare a $20 million cash dividend without any qualms whatsoever? No, because the $20 million of retained earnings would probably not be held as cash. The retained earnings figure represents the reinvestment of earnings by the firm. Consequently, the $20 million would be an investment in all of the firms assets. Question 3. The Menendez Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be $1.5 million. All sales revenue will be collected in cash, and cost other than depreciation must be paid for during the year. Menendez federal-plus-state tax rate is 40%. a. Set up an income statement. What is Menendezs expected net cash flow? Income Statement Sales revenues Costs except depreciation (75%) Depreciation EBT Taxes (40%) Net income Add back depreciation Net cash flow Answer: $2,400,000. b. Suppose Congress changed the tax laws so that Menendezs depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and t net cash flow? $12,000,000 9,000,000 1,500,000 $1,500,000 600,000 $ 900,000 $1,500,000 $ 2,400,000

If depreciation doubled, taxable income would fall to zero and taxes would be zero. Thus, net income would decrease to zero, but net cash flow would rise to $3,000,000. Menendez would save $600,000 in taxes, thus increasing its cash flow: DCF = T(DDepreciation) = 0.4($1,500,000) = $600,000. The new income statement would look like this: Income Statement Sales revenues $12,000,000 Costs except depreciation (75%) 9,000,000 Depreciation 3,000,000 EBT $0 Taxes (40%) $0 Net income $0 Add back depreciation $3,000,000 Net cash flow $ 3,000,000

Answer: NI = 0; NCF = $3,000,000. c. Now suppose that Congress, instead of doubling Menendezs depreciate, reduced it by 50%. How would profit and net cash flow be affected? If depreciation was reduced by 50%, taxable income would rise to $2,250,000 and taxes to $900,000. Therefore, net income would rise to $1,350,000, but net cash flow would fall to $2,100,000. The new income statement would look like this: Income Statement Sales revenues $12,000,000 Costs except depreciation (75%) 9,000,000 Depreciation 750,000 EBT $2,250,000 Taxes (40%) $900,000 Net income $1,350,000 Add back depreciation $750,000 Net cash flow $ 2,100,000 Answer: NI = $1,350,000; NCF = $2,100,000.

d. If this were your company would you prefer Congress to cause your depreciation expense to be doubled or halved? Why? I would prefer to have higher depreciation charges because this would lead to higher cash flows. Net cash flows are the funds that are available to the owners

to withdraw from the firm and, therefore, cash flows should be more important to them than net income. Question 4 Project K has a cost of $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its cost of capital is 12%. a. What is the projects payback period (to the closest year)? $52,125/$12,000 = 4.3438, so the payback is about 4 years b. What is the projects discounted payback period?

Project K's discounted payback period is calculated as follows: Annual Period Cash Flows 0 ($52,125) 1 12,000 2 12,000 3 12,000 4 12,000 5 12,000 6 12,000 7 12,000 8 12,000 Discounted @12% Cash Flows ($52,125.00) 10,714.80 9,566.40 8,541.60 7,626.00 6,808.80 6,079.20 5,427.60 4,846.80 Cumulative ($52,125.00) (41,410.20) (31,843.80) (23,302.20) (15,676.20) (8,867.40) (2,788.20) 2,639.40 7,486.20

The discounted payback period is 6 +

$2,788.20 years, or 6.51 years. $5,427.60

Alternatively, since the annual cash flows are the same, one can divide $12,000 by 1.12 (the discount rate = 12%) to arrive at CF1 and then continue to divide by 1.12 seven more times to obtain the discounted cash flows (Column 3 values). The remainder of the analysis would be the same. c. What is the projects NPV? NPV = -$52,125 + $12,000[(1/i)-(1/(i*(1+i)n)] = -$52,125 + $12,000[(1/0.12)-(1/(0.12*(1+0.12)8)] = -$52,125 + $12,000(4.9676) = $7,486.20. Financial calculator: Input the appropriate cash flows into the cash flow register, input I = 12, and then solve for NPV = $7,486.68. d. What is the projects IRR

Input the appropriate cash flows into the cash flow register and then solve for IRR = 16%.

Question 5 Edelman Engineering is considering including two pieces of equipment, truck and an overhead pulley system, in this years capital budget. The projects are independent. The cash outlay for the truck is $17,100, and that for the pulley system is $22,430. The firms cost of capital is 14%. After-tax cash flow, including depreciation, are as follows: Year Truck Pulley 1 $5,100 $7,500 2 5,100 7,500 3 5,100 7,500 4 5,100 7,500 5 5,100 7,500 Calculate the IRR and the NPV, and indicate the correct accept/reject decision for each.

Truck: NPV = -$17,100 + $5,100(PVIFA14%,5) = -$17,100 + $5,100(3.4331) = -$17,100 + $17,509 = $409. (Accept) Financial calculator: Input the appropriate cash flows into the cash flow register, input I = 14, and then solve for NPV = $409. Financial calculator: Input the appropriate cash flows into the cash flow register and then solve for IRR = 14.99% 15%. (Accept) Pulley: NPV = -$22,430 + $7,500(3.4331) = -$22,430 + $25,748 = $3,318. (Accept) Financial calculator: Input the appropriate cash flows into the cash flow register, input I = 14, and then solve for NPV = $3,318. Financial calculator: Input the appropriate cash flows into the cash flow register and then solve for IRR = 20%. (Accept) According to the NPV rule we accept projects with NPV 0 According to the IRR rule, we accept projects if the IRR is greater than the cost of capital. Question 6 Your division is considering tow investment projects, each of which requires and

upfront expenditure of $25 million. You estimate that the cost of capital is 10%, and that the investments will produce the following after-tax cash flows (in millions of dollars). Year Project A 1 5 2 10 3 & nbsp; 4 &nbs p; a. Project B 20 10 15 & nbsp; 20

8 ; 6

What is the regular payback period for each of the projects?

Payback A (cash flows in thousands): Period 0 1 2 3 4 Annual Cash Flows ($25,000) 5,000 10,000 15,000 20,000 Cumulative ($25,000) (20,000) (10,000) 5,000 25,000

PaybackA = 2 + $10,000/$15,000 = 2.67 years. Payback B (cash flows in thousands): Annual Period Cash Flows Cumulative 0 ($25,000) $25,000) 1 20,000 (5,000) 2 10,000 5,000 3 8,000 13,000 4 6,000 19,000 PaybackB = 1 + $5,000/$10,000 = 1.50 years b. What is the discounted payback period for each of the projects?

Discounted payback A (cash flows in thousands): Period 0 1 2 3 4 Annual Discounted @10% Cash Flows Cash Flows Cumulative ($25,000) ($25,000.00) ($25,000.00) 5,000 4,545.45 ( 20,454.55) 10,000 8,264.46 ( 12,190.09) 15,000 11,269.72 ( 920.37) 20,000 13,660.27 12,739.90

Discounted PaybackA = 3 + $920.37/$13,660.27 = 3.07 years. Discounted payback B (cash flows in thousands): Period 0 1 2 3 4 Annual Discounted @10% Cash Flows Cash Flows Cumulative ($25,000) ($25,000.00) ($25,000.00) 20,000 18,181.82 ( 6,818.18) 10,000 8,264.46 1,446.28 8,000 6,010.52 7,456.80 6,000 4,098.08 11,554.88

Discounted PaybackB = 1 + $6,818.18/$8,264.46 = 1.825 years c. If the two projects are independent and the cost of the capital is 10%, which project or projects should the firm undertake? NPVA = $12,739,908; IRRA = 27.27%. NPVB = $11,554,880; IRRB = 36.15%. Both projects have positive NPVs, so both projects should be undertaken. d. If the two projects are mutually exclusive and the cost of capital is 5%, which project should the firm undertake? At a discount rate of 5%, NPVA = $18,243,813. At a discount rate of 5%, NPVB = $14,964,829. At a discount rate of 5%, Project A has the higher NPV; consequently, it should be accepted. e. If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake? At a discount rate of 15%, NPVA = $8,207,071. At a discount rate of 15%, NPVB = $8,643,390.

At a discount rate of 15%, Project B has the higher NPV; consequently, it should be accepted.