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1) Kimmel Company. has provided the following data concerning a proposed investment project:
Initial investment $250,000
Life of the project 10 years
Annual net cash inflows $32,000
Salvage value $5,000
The company uses a discount rate of 15%.
Compute the net present value of the project.
The management of Erion Corporation is considering the purchase of an automated molding machine that would cost $280,534, would have a useful life of 5 years, and would have no salvage value. The automated molding machine would result in cash savings of $74,000 per year due to lower labor and other costs.
Determine the internal rate of return on the investment in the new automated molding machine. Show your work!
The Ace Manufacturing Company is trying to decide if it should invest in a new machine or refurbish the
current machine already in use in its manufacturing facility.
Investment Decision Alternative 1 - Refurbish the Current Machine
The Current Machine in use can be refurbished at an immediate cost of $180,000. Further repairs and
an overhaul will be needed in 5 years at a cost of $50,000. The current machine after refurbishing will
have a useful life of 10 years. At the end of the 10 years, the scrap (salvage) value of the machine will
be $20,000.The Net Annual cash flows as a result of the refurbishing will yield $40,000 for the ten year period.
Investment Decision Alternative 2 - Purchase a New Machine
As an alternative choice, the company can invest in a New Machine at a cost of $300,000. The New
Machine will have a useful life of 10 years, but it will require some repairs at the end of 5 years of
$5,000. At the end of ten years the New Machine will have a scrap (salvage) value of $40,000. The Net
Annual cash flows as a result of buying the New Machine will be $50,000 for the ten year period. If the
Company decides to buy the New Machine, the Old Machine has a salvage value and can be sold for
Ace Manufacturing Company requires a return of 12% on
all Investment projects (before taxes).
1) Compare the two Investment Alternatives using a Net Present Value Approach.
2) Which Investment Alternative should the Company choose?
- PLEASE EXPLAIN THE REASON FOR CHOOSING THE INVESTMENT -
The sales manager of ABC Inc. submitted the forecasted credit sales of products for the
the last six months of 2014 for budgetary purposes.
1) Sales Forecast 2014 (Units)
July $ 200,000
August $ 225,000
September $ 164,000
The company is in the process of preparing a cash budget and must determine the
expected cash collections by month. To this end, the following information has been
Collections on credit sales:
45% in month of Sales
35% in the first month following sales
20% in the second month following sales
Given these data., the total cash collected during July, August and September would be:
XYZ Inc. is working on its cash budget for June. The budgeted beginning cash balance is $14,000.
Budgeted Cash Receipts total $183,000 and budgeted Cash Disbursements total $182,000. The
desired ending Cash Balance is $33,000. The company has a line-of-credit agreement with its bank
up to $80,000 to borrow in case the Cash Balance at the end of a month does not meet the aforementioned minimum.
Please use an Excel Sheet to solve the next two problems.
2. You are considering purchasing a lifetime subscription to the Wall Street Journal. Current annual subscription is $250 payable at the beginning of each year. You expect the subscription price to increase at a rate of 2% per annum. You will retire in 20 years to an island and therefore you do not expect to read the WSJ when you retire. WSJ offers a lifetime subscription of $1800. Assuming you can earn 5% annually, what would you do? Hint, if you take out an annual subscription, the last payment is in year 19.
3. For extra credit, show how you would do the above problem (2) using PV formulas for growth.
Please use an Excel Sheet to solve the next two problems.
1. Assume that you are planning to buy a house in Springfield, NJ. You are convinced that you can buy the house for $500,000. To be livable, you will need to spend an additional $150,000. Hence, assume after you are done with the additional construction, the house will be worth $650,000. You estimate that the value of the house will increase by 6% per annum. You estimate that property tax will equal 2% of the market value at the beginning of each year, but is payable at the end of each year. You plan to live in the house for 20 years at which time you will sell the house. Hence, you pay no property tax in year 21. You can afford to pay down $150,000 and borrow the remaining $500,000 from BANK-U-TRUST with a mortgage interest rate of 4%. The mortgage payments are annual. What is the return on your equity?
The directors have the opportunity to invest in one of two new projects. Both projects involve the acquisition of new machinery. The figures for the projects are as follows:
Cost (will be incurred immediately) 200,000 120,000
Expected annual profits/losses
Year 1 58,000 36,000
Year 2 (2,000) (4,000)
Year 3 4,000 8,000
Estimated scrap value of machinery 14,000 12,000
The business has an estimated cost of capital of 10%. They use a straight line method of depreciation for noncurrent assets to calculate operating profit. The business has sufficient funds to meet the capital expenditure requirements.
For each project calculate:
a) accounting rate of return
c) net present value
d) internal rate of return
You must demonstrate the main methods of project appraisal. Produce a document setting out your findings and the assumptions on which calculations are based. Evaluate each method of project appraisal and make a recommendation to the board as to which project they should invest in.
The board think that they might like to raise money to enable them to invest in both projects. Explain to the board how they might obtain finance for a business project. In addition analyse the components of working capital and explain how the company can better manage their working capital so that they could finance both projects.
1. The weighted average cost of capital (WACC) can be related to the basic accounting equation, as follows: A = L +OE
Compare and contrast the WACC to this basic accounting equation. Does the WACC contain a profit component? How does the WACC relate to the discount rate used in t a net present value(NPV) computation, using a case where NPV equals zero to make your point?
1. In a typical loan amortization the principal component of a fixed payment increases and the interest component decreases with each payment. The following figure illustrates this relation for a hypothetical 30 –year mortgage. Assume that someone borrows $5000 at an interest rate of 9 percent per year for five years, and agrees to make interest and principal payments in the amount of $1285.46 at the end of each year. Prepare a loan amortization schedule for each of the five years, showing the beginning principal balance, the total payment of 1285.46, the interest component of the payment, the principal component of the payment and the ending principal balance. Filling the blank spaces in the following framework to complete.
Loan amortization schedule
For a Loan of $5,000 at 9% interest, over 5years
Year Beg Bal total Payment Interest
Paid Principal paid Ending
1 5,000 1285.46 ? ? ?
2 ? 1285.46 ? ? ?
3 ? 1285.46 ? ? ?
4 ? 1285.46 ? ? ?
5 ? 1285.46 ? ? ?
Total 6427.3 ? 5000
NPA and IRR
Assume that a project has a negative net present value (NPV) of $500 and an internal rate or return (IRR) of 10%. Is the discount rate used to calculate the NPV higher than, lower than, or equal to 10%? Compare and contrast these two techniques, using this example and focusing on the IRR when the NPV is positive, zero and negative.
Recall that the security market line (SML) illustrates the relationship between systematic risk and expected returns. Perhaps the most famous and practical application of the SML is the capital asset pricing model (CAPM), as follows:
E(R_i )= R_f+[E(R_m )- R_f ]Xβ_█(i@)
Define each of the variables or terms in this equation.
Calculate the E(R_i ), assuming the E(R_m ) equals 12%,R_f equals 6%,and β_█(i@) equals 1.12.
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