Assignment #2: Capital Budgeting - Evaluating Cash Flows Carefully read and complete the following questions. In addition to the marks indicated, you will also be graded on format and presentation (5 marks), grammar and spelling (5 marks). This assignment is worth a total of 100 marks and is 10% of your overall grade. 1. a). You have been assigned the task of evaluating two mutually exclusive projects with the following cash flows: (Marks: 10) Year 01234 Project A Cash Flows $(5,000) 1,000 Project B Cash Flows $(5,000) 4.500 1,500 (1,500) (2,000) 4,000 1,000 500 Requirements: The projects are equally risky, and their cost of capital is 12%. You must make a recommendation, and you must base it on the modified IRR. What is the MIRR of the better project? (Show your steps) b). Project J has a cost of $22,000 and is expected to produce benefits (cash flows) of $7,000 per year for 4 years (1-2; 4-5). Project K costs $70,000 and is expected to produce cash flows of $20,000 per year for 4 years (1-2; 4-5), however in year 3, each project has a cash outflow of $5,000 for Project J and $7,000 for Project K. Calculate the two projects' NPVS, IRRS, MIRRS and PIs assuming a cost of capital of 10%. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which project should actually be selected? (Marks: 20) 2. A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. (Marks: 30) Requirements: a. What is the project's NPV? b. What is the project's IRR? c. What is the project's PI? d. What is the project's payback period? e. What is the project's discounted payback period? 3. Jacob's Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $39,500, and that for the pulley system is $94,800. The firm's cost of capital is 14%. After-tax cash flows, including depreciation, are as follows: Year Truck Pulley $12,500 12,500 $31,000 31,000 12,500 31,000 12,500 31,000 12,500 31,000 Requirements: Calculate the IRR, the NPV, Payback and Discounted Payback Periods for each project and indicate the correct accept/reject decision for each. (Marks:20) 4. You are the project manager for Becker Enterprises, LTD. and have been asked to analyze two alternatives for the company's newest plastics division. The two alternatives, A and B, will perform the same task, but Alternative A will cost $80,000 to purchase while Alternative B will cost only $55,000. Moreover, the two alternatives will have very different cash flows and useful lives. The after-tax costs for the two projects are as follows: (Marks: 10) Year A 0 B $(80,000) (20,000) (20,000) $(55.000) (6,000) (6,000) (20,000) (6,000) (20,000) (20,000) (20,000) (20,000) a. Calculate each project's EAC, given a 10% discount rate. b. Which of the alternatives do you think the company should select and why? Optional Bonus Question: (Extra Marks on Assignment Grade: 12) This is a bonus question, which can be used to earn extra points. This question is entirely optional and will not affect either your grade for this assignment or your overall grade, if you choose not to complete it (i.e no points will be deducted for not completing the bonus question). If you decide to complete the question, you can earn an extra 12 points, which will be added to your lowest assignment grade. Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is 10% and that the investments will produce the following after-tax cash flows: Year 1 2 Project L 5,000,000 10,000,000 Project M 20,000,000 10,000,000 8,000,000 6,000,000 3 4 15,000,000 20,000,000 a). What is the regular payback period for each of the projects? b). What is the discounted payback period for each of the projects? c). If the two projects are independent and the cost of capital is 10%, which project or projects should the firm undertake? d). If the two projects are mutually exclusive and the cost of capital is 5%, which project should be undertaken? e). If the two projects are mutually exclusive and the cost of capital is 15%, which project should the firm undertake? f). If the cost of capital is 10%, what is the modified IRR of each project?