Business Finance(FINA 210) The Basic of Capital Budgeting-Ch 10 Questions-Class P o!le"s 10#1 Pa$!

ac% pe iod Project K has a cost of $52,125, its expected net cash flows are $12,000 per year for 8 years, and its cost of capital is 12 percent. What is the projects pay ac! period" 10#&' NP(s and I))s fo independent p o*ects #del$an #n%ineerin% is considerin% incl&din% two pieces of e'&ip$ent, a tr&c! and an o(erhead p&lley syste$, in this years capital &d%et. )he projects are independent. )he cash o&tlay for the tr&c! is $1*,100, and that for the p&lley syste$ is $22,+,0. )he fir$s cost of capital is 1+ percent. -fter.tax cash flows, incl&din% depreciation, are as follows +ea 1 2 , + 5 T uc% $5,100 $5,100 $5,100 $5,100 $5,100 Pulle$ $*,500 $*,500 $*,500 $*,500 $*,500

Calculate the I)), NP(and the -I)) fo each p o*ect, and indicate the co ect accept. e*ect decision fo each# 10#/'Capital !udgeting "ethods Project / costs $15,000 and is expected to prod&ce cash flows of $+,500 per year for 5 years. Project 0 costs $,*,500 and is expected to prod&ce cash flows of $11,100 per year for 5 years. 1alc&late the two projects 2P3s and 455s, ass&$in% a cost of capital of 1+6. Which project wo&ld e selected ass&$in% they are $&t&ally excl&si(e, &sin% each ran!in% $ethod" Which sho&ld act&ally e selected" 10#10' NP( and I)) -fter disco(erin% a new %old (ein in 1olorado 7o&ntains, 1)1 7inin% 1orporation $&st decide whether to $ine the deposit. )he $ost cost.effecti(e $ethod of $inin% %old is s&lf&ric acid extraction, a process that res&lts in en(iron$ental da$a%e. )o %o ahead with the extraction, 1)1 $&st spend $800,000 for new $inin% e'&ip$ent and pay $195,000 for its installation. )he %old $ined will net the fir$ an esti$ated $,50,000 each year o(er the 5.year life of the (ein. 1)1s cost of capital is 1+6. :or the p&rposes of this pro le$, ass&$e that the cash inflows occ&r at the end of the year. a. What is the 2P3 and 455 of this project . /ho&ld the project e &nderta!en, i%norin% en(iron$ental concerns"

10#11'' NP( and I)) 1&$$in%s Prod&cts 1o$pany is considerin% two $&t&ally excl&si(e in(est$ents. )he projects expected net cash flows are as follows; +ea 0 1 2 , + 5 9 * 23pected net cash flo4s P o*ect A <$,00= <,8*= <18,= <100= 900 900 850 <180= P o*ect B <$+05= 1,+ 1,+ 1,+ 1,+ 1,+ 1,+ 0

a. 4f yo& were told that each projects cost of capital was 12 percent, which project sho&ld e selected" 4f the cost of capital was 18 percent, what wo&ld e the proper choice" . 1onstr&ct the 2P3 profiles for projects - and >" c. What is each projects 455" d. What is the crosso(er rate, and what is its si%nificance" 10#20'' Pa$!ac% and discounted pa$!ac% pe iods ?o&r di(ision is considerin% two instr&$ent projects, each of which re'&ires an &p.front expendit&re of $25 $illion. ?o& esti$ate that the cost of capital is 10 percent and that the in(est$ent will prod&ce the followin% after.tax cash flows <in $illions of dollars= +ea 1 2 , + a. . c. d. P o*ect A $5 10 15 20 P o*ect B $20 10 8 9

What is the re%&lar pay ac! period for each of the project" What is the disco&nted pay ac! period for each of the projects" 4f the two projects are independent and K@106, which projects sho&ld the fir$ &nderta!e" 4f the two projects are $&t&ally excl&si(e and K@5 6 ,which project sho&ld the fir$ &nderta!e" e. 4f the two projects are $&t&ally excl&si(e and K@15 6 which project sho&ld the fir$ &nderta!e" f. What is the crosso(er rate"