See below. Example Problems | Find the NPV for the following Capital Budgeting project. | Year | | Cash Flow | | 0 | $ | -10 | | 1 | $ | 5 | | 2 | $ | 2 | | 3 | $ | 2 | | 4 | $ | 2 | | 5 | $ | 2 | | Cost of Capital: | | 10 | % | NPV: | $ | 0.31 | | | (cost done in millions) (http://www.zenwealth.com/businessfinanceonline/CB/NetPresentValue.html) 7-21 NPVs and IRR's for Mutually Exclusive Projects You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity.
QUESTIONS 1. Table 1 contains the complete cash flow analysis based on GP Manufacturing’s basic information. Explain the inputs into 1) the net initial investment outlay at year 0, 2) the depreciation tax savings in each year of the project’s economic life, and 3) the project’s incremental cash flows? 1. Net initial investment outlay is $302,040.
Net working capital | Year 1 | Year 2 | Year 3 | Year 4 | | Inventory | 1,5 | 1,5 | 1,5 | | All in millions | receivables | 16,5 | 12,45 | 8,25 | | | payables | 1,6 | 1,6 | 1 | | | NWC(=Inventory+receivables-payables) | 16,4 | 12,35 | 8,75 | | | Change in NWC | 16,4 | -4,05 | -3,6 | -8,75 | | Q6. FCF = (Revenue – Costs – Depreciation) x (1 – tax rate) + Depreciation – Capital Expenditure – change in working capital. Free cash flows | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | | Unl Net income | -59,3439 | 70,1337 | 49,3248 | 30,828 | 0 | All in millions | Depreciation | 0 | 8 | 8 | 8 | 0 | | Capital expenditures | 24 | 0 | 0 | 0 | 0 | | Change in NWC | 0 | 16,4 | -4,05 | -3,6 | -8,75 | | Free cash flows | -83,34 | 61,73 | 61,37 | 42,43 | 8,75 | | Q7. | | Year 1 | Year 2 | Year 3 | Year 4 | | NPV per year | -83,34 | 55,12 | 48,93 | 30,20 | 5,56 | All in millions | Total NPV | 56,46 | | | | | | Q8. Rate | NPV(million) | 5% | 74,97 | 10% | 61,35 | 15% | 49,65 | 20% | 39,5 | 25% | 30,63 | 30% | 22,84 | 35% | 15,94 | 40% | 9,81 | 45% | 4,32 | 50% | -0,61 | 55% | -2,89 | 60% | -5,06
The tax on the year 1 deprecation would then be $28,050 * .40, which equals $11,220. After adding $11,020 to the $15,000 in savings, the cash flow for year 1 would equal $26,220. For year 2, the depreciation expense would equal $85,000 * .45, or $38,250. The tax on the year 2 deprecation would then be $38,250 * .40, which equals $15,300. After adding $15,300 to the $15,000 in savings, the cash flow for year 2 would equal $30,300.
2. What is the present value of the following future amounts: Future Value Discount rate Number of periods $15,000 6% 5 $37,000 9% 10 $596,000 11% 4 $1,178,000 9.5% 12 3. Calculate the present value of the following cash inflows assuming an 11% discount rate. Year Cash flow 1 17,000 2 17,000 3 17,000 4 17,000 5 17,000 6 100,000 4. Consider the following two mutually exclusive projects Year Cash Flow Project 1 Cash Flow Project 2 0 -150,000 -150,000 1 $40,000 $100,000 2 $90,000 $80,000 3 $120,000 $60,000 a) Calculate the net present value (NPV) of each project assuming an 8% discount rate.
Caledonia Products Team B A. Answers to question 12a-12e. A. Projects Payback Period Another tool that Caledonia can use to determine if the two additional projects are worth the time and investment is by looking the payback period on each project. The payback period is the number of years needed to recover the initial cash outlay of the capital budgeting project (Keown, Martin, Petty, & Scott, 2005, p. 292).
,Sarah L. G January 6, 2013 Written Assignment #1 1. A) $1,000 with 5% interest after 10 years gives you $1,628. Therefore, you would gain $628 in interest. B) If the interest is withdrawn each year, a total of $500 would be earned because the $1,000 investment would earn $50 of simple interest each year. C) The answers are different because if the interest is left untouched, it makes the principal amount higher each year, giving more money after 10 years.
If operating capital as of 12/31/2010 is $502.2 million, what is the free cash flow for 12/31/2011? Computation of the Free Cash Flow NOWC= ($5.60 + $56.20 + $112.40) NOWC = $174.20 Net Plant and Equipment= ($11.20 + $28.10) Net Plant and Equipment= $39.30 Operating Capital= $174.20 - $39.30 Operating Capital= $134.90 Total Operating Capital=$134.90 + 397.50 Total Operating Capital=$532.40 Change in operating Capital= $532.40 - $502.20 Change in operating Capital= $30.20 FCF= $65.16 - $30.20 FCF=$34.96 b. What is the horizon value as of 12/31/2011? Horizon value = 37.06/ (.11-.06) Horizon value = $741.15 c. What is the value of operations as of 12/31/2010? Value of operations in 2010= $34.96 + $741.15 Value of operations in 2010= $776.11 Value of operations in 2009=$741.15-$41.95 Value of operations in 2009=$699.20 d. What is the total value of the company as of 12/31/2010?
1. Given the following information: Total assets $250,000 Debt (12% interest rate) $150,000 Equity $40,000 Variable costs of production $150 per unit Fixed cost of production $50,000 Units Sold 1,000 Sales price $210 per unit What happens to operating income and net income if output is increased by 10 percent? Verify your answer. Solution: The operating income: Revenues: $210 x (1,000) = $210,000 Expenses: $150 x (1,000) + $50,000 = $200,000 Operating income: $210,000 - 200,000 = $10,000 Net income: $10,000 - (.12 x 150,000) = ($8,000) With 10% increase in revenue: Revenues: $210 x (1,100) = 231,000 Expenses: $150 x (1,100) + $50,000 = $215,000 Operating income: $231,000 - $215,000 = $16,000 Net income $16,000 - (.12 x $150,000) = ($2,000) Operating income rose from $10,000 to $16,000 for a 60% increase. Net income rose from ($8,000) to ($2,000) which cut losses by $6,000.
Once costs are in control, Yamana’s margins will see a positive impact. For instance, in the second half of the year, the company expects its production to increase by nearly 15%. Yamana Gold projects full-year production of 1.3 million ounces of gold, with the all-in sustaining cost expected to average somewhere around $830 an ounce. This is lower than the current gold price of around $1,150 an ounce, indicating that as the year progresses and gold prices improve, Yamana’s margins will get