Part B NPV, Payback, IRR and Profitability Index You go to your desk and your boss comes in I need you to do some work for me Read this and tell me what you think The assignment indicates that the following StuartCo Trains is a large Tank maker It recently built the T123 It can carry a huge payload and is more nimble than other tanks Initial project investments were $13B Assume that the initial investment was paid on Dec 31, 2010 Assume that StuartCo will produce 60 Tanks per year for five years Each Tank will be sold for $230M and total operating costs are 75 of revenues Assume that revenues and costs occur at year end with the first revenues (and costs) occurring on Dec 31, 2011 The assignment your boss gives you asks you to determine the NPV of the project if StuartCo's cost of capital is 11 Calculate the NPV as of Dec 31, 2010 Ignore taxes and assume that there are no terminal year cash flows Show your work, as appropriate and clearly state your answer Your boss then asks what is the payback period for the StuartCo investment outlined above And, the CEO doesn't really get payback so how should I explain it to him What does the payback period calculation mean Your boss then asks you to calculate the Profitability Index as of Dec 31, 2010, for the StuartCo investment outlined in 4 above (4 marks) Your boss wants a recommendation but based on only one of the three sets of analysis above (either NPV, Payback or Profitability Index) Which method do you choose Why Your boss now asks you to tackle something new StuartCo is now planning to make a special add on investment to its tanks The changes will cost $3 million in total, with the expenditure occurring at the end of the year three years from today The changes will bring year end after tax cash inflows of $2 million at the end of the two succeeding years It will then cost $ 5 million to dispose of specialized waste generated by the project at the end of the 3rd year of operation Your boss asks you the following What is the project's IRR If StuartCo Industries requires a minimum return of 10 , should this project be accepted Why What if the minimum return was 15 (3 marks) StuartCo is now considering two independent projects utilizing the internal rate of return technique Project A has an initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000 Project B has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000 Which projects should be accepted if the cost of capital is 15 And which projects should be accepted if the cost of capital is 10 11 Your boss attended a conference and heard about the modified IRR He decides that this is what the company should use to analyze projects The project he wants to be analyzed has a cost of $1,000 at Time 0 and inflows of $300 at the end of Years 1 5 The new cost of capital is 10 He asks you to calculate the project's modified IRR (MIRR)

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Part B: NPV, Payback, IRR and Profitability Index You go to your desk and your boss comes in.I need you to do some work for

Part B: NPV, Payback, IRR and Profitability Index

You go to your desk and your boss comes in."I need you to do some work for me.Read this and tell me what you think."The assignment indicates that the following" StuartCo Trains is a large Tank maker. It recently built the T123. It can carry a huge payload and is more nimble than other tanks. Initial project investments were $13B. Assume that the initial investment was paid on Dec 31, 2010. Assume that StuartCo will produce 60 Tanks per year for five years. Each Tank will be sold for $230M and total operating costs are 75% of revenues. Assume that revenues and costs occur at year-end with the first revenues (and costs) occurring on Dec 31, 2011. The assignment your boss gives you asks you to determine the NPV of the project if StuartCo's cost of capital is 11%? Calculate the NPV as of Dec 31, 2010. Ignore taxes and assume that there are no terminal year cash flows. Show your work, as appropriate and clearly state your answer
Your boss then asks what is the payback period for the StuartCo investment outlined above? And, the CEO doesn't really get payback - so how should I explain it to him. What does the payback period calculation mean?
Your boss then asks you to calculate the Profitability Index as of Dec 31, 2010, for the StuartCo investment outlined in #4 above. (4 marks)
Your boss wants a recommendation - but based on only one of the three sets of analysis above (either NPV, Payback or Profitability Index). Which method do you choose? Why?
Your boss now asks you to tackle something new.StuartCo is now planning to make a special add-on investment to its tanks. The changes will cost $3 million in total, with the expenditure occurring at the end of the year three years from today. The changes will bring year-end after-tax cash inflows of $2 million at the end of the two succeeding years. It will then cost $.5 million to dispose of specialized waste generated by the project at the end of the 3rd year of operation. Your boss asks you the following:
What is the project's IRR?
If StuartCo Industries requires a minimum return of 10%, should this project be accepted? Why? What if the minimum return was 15%? (3 marks)
StuartCo is now considering two independent projects utilizing the internal rate of return technique. Project A has an initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. Project B has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000.
Which projects should be accepted if the cost of capital is 15%? And which projects should be accepted if the cost of capital is 10%?

11. Your boss attended a conference and heard about the modified IRR. He decides that this is what the company should use to analyze projects. The project he wants to be analyzed has a cost of $1,000 at Time = 0 and inflows of $300 at the end of Years 1-5. The new cost of capital is 10%. He asks you to calculate the project's modified IRR (MIRR)