FIN254 Assignment#7 (Based on Chapter 9)

1. You are thinking about expanding your food business by building a new manufacturing plant. The plant has an installation cost of $18 million which will be fully depreciated in 4 years. If the plant has forecasted net income of $1 !"# $"1$ .%# $1&41.' and $1"&8 T()*+,-. o/er the four years# what is the pro0ect1s ,,23 ". *nile/er has identified the following two mutually exclusi/e pro0ects4 Cash flow-A (in Cash flow-B (in thousands Year thousands of dollar) of dollar) $ 5!' 5!' 1 1& " 14.% 1".% ! 1" 1& 4 & "! a. 6hat is the I22 for each of the pro0ects3 *sing the I22 decision rule# which pro0ect should the company accept3 Is the decision necessarily correct3 b. If the re7uired return is 118# what is the -9: of each of the pro0ects3 6hich pro0ect will the company choose if it applies the -9: rule3 c. )/er what rate range of discount rates would the company choose pro0ect ,3 9ro0ect ;3 ,t what discount rate would the company be indifferent between two pro0ects3 <xplain. !. =onsider the following two mutually exclusi/e pro0ects5 Cash flow-A (in Cash flow-B (in thousands Year thousands of dollar) of dollar) $ 5!%$ 5!% 1 "% 1' " '$ 11 ! '$ 1' 4 4!$ 11 <xplain which in/estment you will choose and 6(Y if you re7uire 1%8 return on your in/estment> 1. If you apply payback ". If you apply discounted payback !. If you apply -9: 4. If you apply I22 %. If you apply profitability. 4. -orth +outh is e/aluating a pro0ect with the following cash flows5 Cash flow-A (in Year thousands of dollar) $ 51" 1 %.8 " .% ! ." 4 %.1 % 54.! The company uses 1$8 discount rate. =alculate ?I22 using all three methods discussed in the book.

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