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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"