Question

1. Growth Enterprise, Inc. (GEI) has $40 million that it can invest in any or all of the four capital investment projects (A, B, C, D), which have cash flows as shown in the following table. Table 1. Comparison of Project Cash Flows ($ thousand dollars) Project Type of Year 0 Year 1 Year 2 Year 3 cash flow A. Investment -$10,000 Revenue $21,000 Operating $11,000 expense 0 olo B. -$10,000 | Investment Revenue Operating expense $15,000 $5,833 $17,000 $7,833 -$10,000 0 0 Investment Revenue Operating expense $10,000 $5,555 $11,000 $4,889 $30,000 $15,555 0 Investment -$10,000 0 Revenue $30,000 $10,000 Operating $15,555 $5,555 expense • All revenues and operating expenses can be considered cash items. 0 $5,000 $2,222 Each of these projects is considered to be of equivalent risk. The investment will be depreciated to zero on a straight-line basis for tax purpose. For simplicity, the depreciation per year for a project is equal to the project investment value divided by the life of the project. Project A has 1-year life, Project B has two-year life, and both Project C and D have 3-yar life. GEIs marginal corporate tax rate on taxable income is 40%. None of the projects will have any salvage value at the end of their respective lives.Assuming a 10% discount rate, calculate the NPV of the four projects and rank the projects in order of preference. Show steps.

0 0
Add a comment Improve this question Transcribed image text
Answer #1
A: Year 0 Year 1
Revenue 21,000.00
less: operating expense -11,000.00
less: depreciation -10,000.00
EBIT 0.00
Tax @ 40% 0.00
Net income 0.00
EBIT 0.00
Add: Depreciation 10,000.00
less: tax 0.00
Operating cash flow 10,000.00
Capital spending -10,000.00
Total cash flow -10,000.00 10,000.00
1+r 1.10
PVIF 1.00000 0.90909
PV = Total cash flow*PVIF -10,000.00 9,090.91
NPV = sum of all PVs -909.09
B: Year 0 Year 1 Year 2
Revenue 15,000 17,000
less: operating expense -5,833 -7,833
less: depreciation -5,000 -5,000
EBIT 4,167.00 4,167.00
Tax @ 40% 1,666.80 1,666.80
Net income 2,500.20 2,500.20
EBIT 4,167.00 4,167.00
Add: Depreciation 5,000.00 5,000.00
less: tax -1,666.80 -1,666.80
Operating cash flow 7,500.20 7,500.20
Capital spending -10,000.00
Total cash flow -10,000.00 7,500.20 7,500.20
1+r 1.10
PVIF 1.00000 0.90909 0.82645
PV = Total cash flow*PVIF -10,000.00 6,818.36 6,198.51
NPV = sum of all PVs 3,016.88
C: Year 0 Year 1 Year 2 Year 3
Revenue 10,000.00 11,000.00 30,000.00
less: operating expense -5,555.00 -4,889.00 -15,555.00
less: depreciation -3,333.33 -3,333.33 -3,333.33
EBIT 1,111.67 2,777.67 11,111.67
Tax @ 40% 444.67 1,111.07 4,444.67
Net income 667.00 1,666.60 6,667.00
EBIT 1,111.67 2,777.67 11,111.67
Add: Depreciation 3,333.33 3,333.33 3,333.33
less: tax -444.67 -1,111.07 -4,444.67
Operating cash flow 4,000.33 4,999.93 10,000.33
Capital spending -10,000.00
Total cash flow -10,000.00 4,000.33 4,999.93 10,000.33
1+r 1.10
PVIF 1.00000 0.90909 0.82645 0.75131
PV = Total cash flow*PVIF -10,000.00 3,636.67 4,132.18 7,513.40
NPV = sum of all PVs 5,282.24
D: Year 0 Year 1 Year 2 Year 3
Revenue 30,000.00 10,000.00 5,000.00
less: operating expense -15,555.00 -5,555.00 -2,222.00
less: depreciation -3,333.33 -3,333.33 -3,333.33
EBIT 11,111.67 1,111.67 -555.33
Tax @ 40% 4,444.67 444.67 -222.13
Net income 6,667.00 667.00 -333.20
EBIT 11,111.67 1,111.67 -555.33
Add: Depreciation 3,333.33 3,333.33 3,333.33
less: tax -4,444.67 -444.67 222.13
Operating cash flow 10,000.33 4,000.33 3,000.13
Capital spending -10,000.00
Total cash flow -10,000.00 10,000.33 4,000.33 3,000.13
1+r 1.10
PVIF 1.0000 0.9091 0.8264 0.7513
PV = Total cash flow*PVIF -10,000.00 9,091.21 3,306.06 2,254.04
NPV = sum of all PVs 4,651.32

NPV of project C is the highest, followed by D and then B. A has a negative NPV.

Add a comment
Know the answer?
Add Answer to:
Assuming a 10% discount rate, calculate the NPV of the four projects and rank the projects...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Calculate the payback period, ARR, IRR and NPV (at 12%) for two proposed four-year projects, B1...

    Calculate the payback period, ARR, IRR and NPV (at 12%) for two proposed four-year projects, B1 and B2, the cash flows (EBDIT) for which are as follows: Year 0 1 2 3 4 B1 -60,000 9,000 10,000 25,000 30,000 B2 -60,000 30,000 25,000 10,000 9,000 (Assume that straight-line depreciation is applicable and that there is no income tax.) Why are the NPV and IRR of project B2 superior to B1?

  • Given the following four projects and their cash flows, calculate the discounted payback period with a 5% discount rate...

    Given the following four projects and their cash flows, calculate the discounted payback period with a 5% discount rate discount rate. Cash Flow A B C D Cost $     10,000 $    25,000 $   45,000 $        100,000 Cash flow year 1 $      4,000 $      2,000 $   10,000 $          40,000 Cash flow year 2 $      4,000 $      8,000 $   15,000 $          30,000 Cash flow year 3 $      4,000 $    14,000 $   20,000 $          20,000 Cash flow year 4 $      4,000 $    20,000...

  • The management team of U. Dunnit Limited have four projects for consideration. In the past, they have evaluated project...

    The management team of U. Dunnit Limited have four projects for consideration. In the past, they have evaluated projects against simple payback. The following information is available: Project A Project B Project C Project D Capital outlay 65,000 140,000 30,000 160,000 Net cash inflows: 30,000 45,000 20,000 35,000 ear 20,000 45,000 10,000 35,000 ear 15,000 45,000 10,000 55,000 ear Year 4 10,000 45,000 55,000 Year 5 10,000 45,000 65,000 REQUIRED Evaluate the projects using each of the following methods: (a)...

  • Newtown Corp. has to choose between two mutually exclusive projects. If it chooses project A, Newtown...

    Newtown Corp. has to choose between two mutually exclusive projects. If it chooses project A, Newtown Corp. will have the opportunity to make a similar investment in three years. However, if it chooses project B, it will not have the opportunity to make a second investment. The following table lists the cash flows for these projects. If the firm uses the replacement chain (common life) approach, what will be the difference between the net present value (NPV) of project A...

  • A firm evaluates all of its projects by applying the NPV decision rule. A proposed project...

    A firm evaluates all of its projects by applying the NPV decision rule. A proposed project is expected to have the following cash flows: Year Cash Flow 0 $ (26,000) 1 $ 11,000 2 $ 14,000 3 $ 10,000 a) At a required return of 11 percent, what is the project's NPV? Should the firm accept this project? b) At a required return of 24 percent, what is the project's NPV? Should the firm accept this project? Is there an...

  • QUESTION 1 Star Industries is considering three alternative projects for the company's investment. The cash flows for three independent projects are as follows: Year 1 Project A ($50,000) $10,...

    QUESTION 1 Star Industries is considering three alternative projects for the company's investment. The cash flows for three independent projects are as follows: Year 1 Project A ($50,000) $10,000 $15,000 $20,000 $25,000 $30,000 Project B ($100,000) $25,000 $25,000 $25,000 $25,000 $25,000 Project C ($450,000) $200,000 $200,000 $200,000 a) If the discount rate for all three projects is 9.5 percent, calculate the profitability index (PI) of these three projects. Which project will be accepted if the projects are mutually exclusive? b)...

  • Trade Wind's Enterprises Ltd (Tw) has £20 two capital investment projects, which have cash flows as...

    Trade Wind's Enterprises Ltd (Tw) has £20 two capital investment projects, which have cash flows as shown below. ,000 that it can invest in any or all of the Comparison of Project Cash Flows* Year of Cash Flow Year 0 Year I Year 3 Type of Cash Flow Project Year 2 (E10 000) Investment Revenue Operating expenses Investment Revenue Operating expenses A. £10000 11,000 30 000 4 889 15 555 B. (10 000) £5 000 10000 2222 15 555 5555...

  • A company is considering the following projects. The cash flows for four projects are as follows:...

    A company is considering the following projects. The cash flows for four projects are as follows: Year4 Investment Year1 Yea2 AT $3,000 $500 $3,000 $1,000 $3,0000 Year3 $500 0 O co 1,000 o $5000 $3500 Which project is the most valuable? Assuming everything else the same. All four investments have equal value.

  • what is the project's NPV 8. Newington Co. is considering Projects S and L, whose cash...

    what is the project's NPV 8. Newington Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. r: 8.50 %...

  • ​(NPV calculation​) Calculate the NPV given the following cash​ flows, __​, if the appropriate required rate...

    ​(NPV calculation​) Calculate the NPV given the following cash​ flows, __​, if the appropriate required rate of return is 8 percent. Should the project be​ accepted? What is the​ project's NPV​? ​$  ​(Round to the nearest​ cent.) YEAR CASH FLOWS    0 −​$90,000    1      30,000    2      30,000    3      25,000    4      25,000    5      10,000    6      10,000 ​(Click on the icon located on the​ top-right corner of the data table above in order to copy its contents into a spreadsheet.​) PrintDone

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT