Question

make capital budgeting decisions nterrelated and Consider the case of Fuzzy Button Clothing Company: Last Tuesday, Fuzzy Button Clothing Company lost a portion of its planning and financial data when both its main and its backup servers crashed. The company's CFO remembers that the internal rate of return ((IRR) of Project Delta is 13.8%, but he can't recall how much Fuzzy Button originaly Invested in the project nor the project's net present value (NPV). However, he found a note that detailed the annual net cash fflows expected to be generated by Project Delta. They are: Year Cash Flow $2,200,000 Year 1 Year 2 $4,125,000 Year 3 $4,125,000 Year 4 $4,125,000 The CFO has asked you to compute Project Delta's initial investment using the information currently available to you. He has offered the following suggestions and observations: A project's IRR represents the return the project would generate when its NPV is zero or the discounted value of its cash inflows equals the discounted value of its cash outflows-when the cash flows are discounted using the project's IRR. The level of risk exhibited by Project Delta is the same as that exhibited by the company's average project, which means that Project Delta's net cash flows can be discounted using Fuzzy Button's 8% WACC. and its NPV is Given the data and hints, Project Delta's initial investment is (rounded to the nearest whole dollar). if the project's cash inflows increase, and everything else is unaffected. A project's IRR will deseax B Stay the Same Increase Save&Continu Grade It Now Flash Player W1IN 32,0,0,270 Q3 3.34.1 2004-2016 Aplia. All rights reserved 2013 Cengage Learning except as noted. All rights reserved.

Answer 1

rate positively .. let me know if you need any clarification..

ans 1
	Computation of initial investment.
	Initial investment = PV of cash flow at IRR of 13.8%
		i	ii	iii=i*ii
	year	Cash flow	PVIF @ 13.8%	Present value
	1	2200000	0.878735	1,933,216
	2	4125000	0.772175	3,185,220
	3	4125000	0.678536	2,798,963
	4	4125000	0.596254	2,459,546
				10,376,945
	therefore initial investmnet =			10,376,945
ans 2
	NPV computation -
		i	ii	iii=i*ii
	year	Cash flow	PVIF @ 8%	Present value
	0	(10,376,945)	1	(10,376,945)
	1	2200000	0.925926	2,037,037
	2	4125000	0.857339	3,536,523
	3	4125000	0.793832	3,274,558
	4	4125000	0.73503	3,031,998
				1,503,171
	NPV =			1,503,171
ans 3	Project IRR will INCREASE if the project's cash inflow increases, and everything else is unaffected.
ans 4	In general, the LOWER the payback, other things constant, the greater the project's liquidity
Ans 5	First we have to compute the Initial investment using payback period
	Initial investment = Cash flow of 2 year + 0.5* cash flow of year 3
	Initial investment = 350000+500000+0.5*500000
			1100000
	Now we can compute the NPV
		i	ii	iii=i*ii
	year	Cash flow	PVIF @ 8%	Present value
	0	(1,100,000)	1	(1,100,000)
	1	350000	0.925926	324,074
	2	500000	0.857339	428,669
	3	500000	0.793832	396,916
	4	400000	0.73503	294,012
				343,672
		therefore answer =		343,672
Ans 6	correct answer is option -
	The payback period does not take the time value of money into account
	the payback period does not take the project's entire life into account