Ellis_PA2.docx - Word Jordan R Ellis X File Home Insert Design Layout References Mailings Review View Help Tell me what you want to do Share & Cut Find * Times New R * 11 ~ A A Aa- A = = OF. 21 1 Copy AaBbCcDc AaBbCcDc AaBbCc AaBbCct Aa B AaBbCc[ AaBbCcDa AaBbCcDa Sac Replace Paste Format Painter BI U - abe X2 X' A . Z . A 1 Normal 1 No Spac... Heading 1 Heading 2 Title Subtitle Subtle Em... Emphasis Select Clipboard Font Paragraph Styles Editing c) Think about changes that happen in a project once it has been accepted and moving forward. Here are 3 potential scenarios. For each, describe what you expect to happen to a project's expected NPV, and WHY that is your expectation. (2 pts for each of the following) As MBA students, just being able to calculate NPV isn't sufficient. You should be able to consider what the effects of various market or project changes on the project's viability. LOOK AT EACH SITUATION INDIVIDUALLY AND ASSUME THAT THERE ARE NO OTHER CHANGES FOR THE FIRM. i. Two years ago, when the original cash flow projections were prepared for one of your company's projects it was assumed that the needed equipment upgrades in year 2 would cost $2mm and with inflation and technology problems, this cost has been revised to $2.8mm. ii. This project was expected to require 24 months of development work, with cash flows forecast for years 3 through 15 of the project's life. Due to better than expected labor and supply issues, it will now take only 12 months for the development work and the same annual cash flows are now forecast for years 2 through 14. 6 Page 6 of 7 1535 words DE + 100% 3:00 PM w ] 2 2/11/2023Ellis_PA2.docx - Word Jordan R Ellis X File Home Insert Design Layout References Mailings Review View Help Tell me what you want to do Share & Cut Find * Times New R * 11 ~ A A Aa- A = = OF. 2 21 1 AaBbCcDc AaBbCcDc AaBbCc AaBbcct Aa B AaBbCcC AaBbCcDa AaBbCcDa Copy Sac Replace Paste B I U - abe X2 X' A . Z . A. 1 Normal 1 No Spac... Heading 1 Heading 2 Title Subtitle Subtle Em... Emphasis Select Format Painter Clipboard Font Paragraph Styles Editing MBA702 Spring 2023, API PRACTICAL APPLICATION 2 iii. Your firm has a project expected to begin work in mid-2023. When the original financial projections and analysis were done in mid-2021, the firm was expected a required return of 13%. Due to inflation and the associated increase interest rates, the firm's new required rate of return for this project is 15%. d) Your firm is looking at two mutually exclusive projects (be sure you know what this means, as compared to "independent projects"). Project X has an NPV of $750,000 and an IRR of 14.3%. Project Y has an NPV of $650,000 and an IRR of 18.8%. Your firm's required rate of return is 15.5%. Which of these mutually exclusive projects would you accept (either, both, or one particular project -- be specific, it matters). WHY is that your decision? (2 pts) The lecture notes cover this one, review as needed. Page 7 of 7 1535 words E + 100% 3:01 PM 2 2/11/2023