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Growth Enterprise , Inc. (GEI)
Project Type of cash flow Year 0 Year 1 Year 2 Year 3
A. Investment -$10,000 0 0 0
Revenue 0 $21,000 0 0
Operating expense 0 $11,000 0 0
Lifespan 1Depreciation $10,000
ree !ash low "10,000
B. Investment -$10,000 0 0 0
Revenue 0 $1,000 $1!,000 0
Operating expense 0 $,"## $!,"## 0
Lifespan 2
Depreciation $,000 $,000
ree !ash low "#,$00 "#,$00
. Investment -$10,000 0 0 0
Revenue 0 $10,000 $11,000 $#0,000
Operating expense 0 $, $%,""& $1,
Lifespan #
Depreciation $#,### $#,### $#,###
ree !ash low "%,000 "$,000 "10,000
D. Investment -$10,000 0 0 0
Revenue 0 $#0,000 $10,000 $,000
Operating expense 0 $1, $, $2,222
Lifespan #
Depreciation $#,### $#,### $#,###
ree !ash low "10,000 "%,000 "3,000
1&a). !alc'late Payac of each project an* ran the fo'r projects in or*er of preference ase* on pa
Project Initial +'tlay Year 1 Year 2 Year 3 Payac
$10,000 $0 $0 1
Outstan'in -10000 $0 $0 $0
- $!,00 $!,00 $0 0.## 1.33
Outstan'in -10000 -$2,00 $,000 $,000
! $%,000 $,000 $10,000 0.10 2.1
Outstan'in -10000 -$(,000 -$1,000 $&,001
$10,000 $%,000 $#,000 1
Outstan'in -10000 $0 $%,001 $!,001
Payac perio* is 1 year for project , 1.33 years for project -, 2.1 years for project ! an* 1 year for
1&). !alc'late I// of each project an* ran the fo'r projects in or*er of preference ase* on I// (2
- !
Initia) Out) -$10,000 -$10,000 -$10,000 -$10,000
*ear 1 $10,000 $!,00 $%,000 $10,000
*ear 2 $0 $!,00 $,000 $%,000
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*ear # $0 $0 $10,000 $#,000
I// 0.00 31. 33.$3 %2.#$
1&c). ss'in a 10 *isco'nt rate, calc'late the 4P5 of the fo'r projects an* ran the projects in o
- !
*ear 0 -$10,000 -$10,000 -$10,000 -$10,000
*ear 1 $10,000 $!,00 $%,000 $10,000
*ear 2 $0 $!,00 $,000 $%,000
*ear # $0 $0 $10,000 $#,000
4P5 &"606.06 "3,017. "$,22.2% "%,7$1.32
1&*). If the projects are in*epen*ent of each other, which sho'l* e accepte*8 If they are 't'ally e9
If the projects are in*epen*ent of each other, projects -, !, an* sho'l* e accepte* eca'se they
positi:e I// an* 4P5 that is reater than the cost of capital.
If the projects are 't'ally e9cl'si:e an* only one can e accepte*, Project sho'l* e accepte* has the hihest I//, shortest payac tie, an* secon*&hihest 4P5, j'st ehin* project !.
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yac approach (1 point).
Perio*
years
years
years
years
roject
oints).
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*er of preference (2 points)
cl'si:e, which one is est8 E9plain why. (1 point)
a:e a
ca'se it
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Electronics ;nliite* (E;)
+a)es
*ear 1 $10,000,000
*ear 2 $1#,000,000
*ear # $1#,000,000
*ear % $",((!,000
*ear $%,###,000ost of +a)es (0 of sa)es
+A xpenses 2#.0 of sa)es
/ax Rate %0
e +pecia)ie' 3uipment $00,000
et 4or5ing apita) 2! of sa)es
Intro'uctor6 expenses
*ear 1 $200,000
Life of e3uipment 6ears
2&a) Estiate the new pro*'ct<s cash flows (3 points)
*ear 0 1 2
+a)es $10,000,000 $1#,000,000
ost of +a)es $(,000,000 $!,"00,000
+A xpense $2,#0,000 $#,0,000
Depreciation $100,000 $100,000
Intro'uctor6 xpense $200,000
Income 7efore tax $1,#0,000 $2,0%,000
/ax $%0,000 $"1",000
et Income $"10,000 $1,22!,000
Operating as8 9)o $&10,000 $1,#2!,000
4or5ing apita) $2,!00,000 $#,10,000 $#,10,000
8ange in 4or5ing apita) -$2,!00,000 -$"10,000 $03uipment -$00,000
Total cash flows &"3,200,000 "100,000 "1,32#,000
2&) ss'in a 20 cost of capital, what is the pro*'ct=s net present :al'e8 >hat is its intern
ost -$#,200,000
9ree as8 9)o
*ear 1 $100,000
*ear 2 $1,#2!,000
*ear # $2,%&(,&10
*ear % $2,0(",21#*ear $1,(#","!!
ost of apita) 20
4et Present 5al'e "60$,72.16
I// 26.$$
E; sho'l* intro*'ce the new pro*'ct eca'se the 4P5 is positi:e an* the I// is reater than t4P5 eans that the project enerates a s'rpl's after all costs, incl'*in financin costs. The I20 cost of capital iplyin that the rate of ret'rn on the project is ore than the *esire* rate.
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# %
$1#,000,000 $",((!,000 $%,###,000
$!,"00,000 $,200,200 $2,&&,"00
$#,0,000 $2,0#(,!% $1,01",2
$100,000 $100,000 $100,000
$2,0%,000 $1,##0,0 $(1%,&%
$"1",000 $#2,022 $2%,&!"
$1,22!,000 $!&",0## $#(",&(!
$1,#2!,000 $"&",0## $%(",&(! et income : 'epreciation
$2,#%0,0&0 $1,1(&,&10 $0
$1,1(&,&10 $1,1!0,1"0 $1,1(&,&10 4or5ing capita) recovere'
"2,%67,610 "2,07,213 "1,73,##
l rate of ret'rn8 ?ho'l* E; intro*'ce the new pro*'ct8 E9plain why8 (2 points).
e cost of capital. The positi:e// of 26.$$ is hiher than the
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5al'e&**e* In*'stries, Inc. (5I)
3&a) >hat is the net present :al'e of this project (1 point)8
;resent <a)ue of as8 9)o $210,000
Initia) Investment -$110,000
4P5 "100,000
3&) @ow any shares of coon stoc 'st e iss'e*, an* at what price to raise the reA'ire* c
um7er of s8ares outstan'ing 10,000
=ar5et va)ue of s8ares $100
xisting va)ue of s8ares $1,000,000
;< $100,000
/ota) <a)ue $1,100,000
<a)ue per s8are $110
Amount to 7e raise' $110,000
um7er of s8ares to 7e issue' 1000
To raise the reA'ire* capital, 5I sho'l* iss'e 1000 shares of coon stoc at "110 each.
3&c) >hat is the effect, if any, of this new project on the :al'e of the stoc of e9istin sharehol*ers
The new project has increase* the :al'e of e9istin stoc fro "100 to "110 per share.
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pital8 (1 point)
8 (1 point)
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FIN 500 Assignment 4, due 08/21/11, 9:00 pm California ti
This assignment provides you an opportunity to practice estimating
budgeting projects (chapter 12), using the common approaches in c
(chapter 13) such as payback, internal rate of return and net present
project , using !cel functions such as irr() and npv() to calculate "
complete this assignment, students need to get familiar with course
and chapter 13'
%roblems in this assignment are chosen from arvard usiness *ch
apital %roject and are revised by the instructor' !is assignment s
indi#idual $or%& -our completed .ssignment / should be saved a!cel workbook file, i'e', '!ls file' The filename should begin assig
and first letter of your first name' 0or e!ample, if .llen *mith com
he should name this assignment as assign/*mith., save and submit
workbook file ('!ls file)' 10' of t!is assignment points $ill "e de
named or formatted as re*uired&
!ere are t!ree pro"lems in t!is assignment, ea(! pro"lem !as
1' rowth nterprise , "nc' (") has / million that it ccapital investment projects (., , , 4), which have cfollowing table'
a"le 1& Comparison of +roe(t Cas! Flo$s -. t!ousand d
+roe(t pe of
(as! flo$
ear 0 ear 1
.' "nvestment 51,
#evenue 21,
6peratinge!pense
11,
' "nvestment 51,
#evenue 17,
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e!pense,
' "nvestment 51,
#evenue 1,
6perating
e!pense
7,777
4' "nvestment 51,
#evenue 3,
6peratinge!pense
17,777
• .ll revenues and operating e!penses can be considered cash item
ach of these projects is considered to be of e;uivalent risk' Tto <ero on a straight5line basis for ta! purpose' For simpli(it,
13a/' alculate %ayback of each project and rank the four projec based on payback approach (1 point)'
13"/' alculate "## of each project and rank the four projects i based on "## (2 points)'
13(/' .ssuming a 1= discount rate, calculate the $%& of the fo projects in order of preference (2 points)
13d/' "f the projects are independent of each other, which shouldmutually e!clusive, which one is best> !plain why' (1 point)
int? -ou need to estimate the free cash flows (00) to the firmrate) B depreciation A ross fi!ed asset e!penditure A change in
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e otal points 14
cash flow for capital
pital budgeting
value in choosing
# and $%&' To
content in chapter 12
ol+s ase on &aluing!ould "e done as an
d submitted as an/, then your last name
letes this assignment,
it as an !cel
du(ted if it)s not
e#eral *uestions&
an invest in any or all of thesh flows as shown in the
llars/
ear 2 ear
18,
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,
11, 3,
/,99: 17,777
1, 7,
7,777 2,222
'
e investment will be deprecit!e depre(iation per ear f
ts in order of preference
order of preference
ur projects and rank the
be accepted> "f they are
first, 00 @ "T(1 Ata!net operating working
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2' lectronics Cnlimited (C)was considering the introduction of a new prohad 7 years of life and was e!pected to generate sales in -ear 1 through 7following?
-ear 1 -ear 2 -ear 3 -ear /
1,, 13,, 13,, 9,DD8,
$o material levels of revenues or e!penses associated with the new producte!pected after five years of sales' ased on past e!perience, cost of sales for
product was e!pected to be D= of total annual sales revenue during each yelife cycle' *elling, general and administrative e!penses were e!pected to be 2total annual sales' Ta!es on profits generated by the new product would be pa
/= rate'
To launch the new product, C would have to incur immediate cash outlaystypes' 0irst, it would have to invest 7, in speciali<ed new productione;uipment' This capital investment would be fully depreciated on a straight5liover the five5year anticipated life of the new product' There would be no salvvalue left for the e;uipment at the end of its depreciable life' $o further fi!ede!penditures were re;uired after the initial purchase of e;uipment'
*econd, additional investment in net working capital to support sales would been made' C generally re;uired 28 cents of net working capital to support
dollar of sales' That is, change in net working capital is 28= of change in sal practical matter, the buildup of working capital would have to be made at the beginning of the sales year in ;uestion (or, e;uivalently, by the end of the preyear)' 0or e!ample, *ales in year 2 were e!pected to be 13, thousand, 3
0inally, C e!pected to incur ta!5deductible introductory e!penses of 2,
first year of the new product+s sales' *uch cost would not be recurring over t product+s life cycle' .ppro!imately 9, had already been spent developtesting marketing the new product'
23a/ estimate the new product+s cash flows' ( points)
23"/ .ssuming a 2= cost of capital, what is the product+s net present value>
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points)'
$ote? !cept for the change in net working capital, which must be made bef
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3' -ou are the 6 of &alue5.dded "ndustries, "nc' (&.")' -our firm has 1shares of common stock outstanding, and the current price of the stock isshare' The firm does not have any debt' -ou discover an opportunity in a
project that produces positive net cash flows with a present value of 21-our total initial costs for investing and developing this project are only -ou will raise the necessary capital for this investment by issuing new e;
potential buyers of your common stock will be fully aware of the project+and cost, and are willing to pay Ffair valueG for the new share of &." costock'
3a/ Ehat is the net present value of this project (1 point)>
3"/ ow many shares of common stock must be issued, and at what price tore;uired capital> (1 point)' int? the stock price should reflect the value creathe investment opportunity'
3(/ Ehat is the effect, if any, of this new project on the value of the stock of