Question
Calculate the NPV for Project Pro V1 (Hint: before you ask me about the discount rate, I had you calculate WACC in part b for
- Calculate the NPV for Project Pro V1 (Hint: before you ask me about the discount rate, I had you calculate WACC in part b for a reason). Do you accept the project based on NPV? Briefly explain your answer. (10 points)
- Define AND Explain the purpose of BOTH scenario analysis and sensitivity analysis in making capital budgeting decisions. (10 points)
- We stated in class that NPV always gives you the correct go/no go decision for a project. Why then should you examine other ratios? Give an example where one of these other ratios might change your decision on a project. (6 points)
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ABC, Inc.
Cash
$140,000
Accounts Payable
$184,000
Accounts Receivable
$200,000
Notes Payable
$75,000
Inventory
$640,000
Long-Term Debt
$302,500
Fixed Assets
$413,000
Equity
$831,500
Total Assets
$1,393,000
Total Liabilities and Equity
$1,393,000
Sales
$860,000
Dividend Payout
40.00%
Cost of Goods Sold
$430,000
Dividend per Share
$2.00
Selling & Admin. Expenses
$250,000
Price of Stock Today
$39.50
EBIT
$180,000
Beta
1.3335
Interest Expense
$80,000
Risk Free
2.00%
Taxable Income
$100,000
Risk Premium
6.00%
Taxes 35%
$35,000
Coupon Rate
4.00%
Net Income
$65,000
Tax Rate
35.00%
Par Value
$25,000
Project Pro V1
Cash Flows
Time 0
-$250,000
Year 1
$80,000
Year 2
$90,000
Year 3
$100,000
Year 4
$110,000
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