Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

please see two attachments one doc for questions other doc for resource. thank you Please make sure you show me how you have arrived at

please see two attachments one doc for questions other doc for resource. thank you

image text in transcribed Please make sure you show me how you have arrived at your calculations. For example, if you are using a formula in excel, make sure you show me the formula so that I can help you if you have done it wrong. (so I would want you to show me that you calculated the present value like this =PV(5%,60,-1000,0,0) so that I can see where you made a mistake. If you just give me the answer then I can't help you see where you went wrong. Also, be sure to be detailed in your answer. 1. LTC and NPV are two methods for valuating a long term capital expenditure. Please describe a situation where it would be better to use LTC instead of NPV, and then vice versa. Please be specific with the situations. (15 points) 2. In the notes that I prepared for you in the Module 9: media and resources section, I gave you an example of calculating NPV. I want you to use that example and calculate what the PV would be if the payments were an equal amount and tell me which one is better and why? Please use the example with 11% required return. (15 points) 3. You have a business that requires the replacement of two 50,000- BTU heating units. Assume that the heaters will be placed in use and will last 10 years. How would you go about deciding what to purchase? List all of the factors that would be part of your decision-making process. Be specific and detailed in your answer. (15 points) 4. The Ohm Depot Co. is currently considering the purchase of a new machine that would increase the speed of manufacturing electronic equipment and save money. The net cost of the new machine is $ 66,000. The annual cash flows have the following projections: Year Amount ($) 0 ( 66,000) 1 21,000 2 29,000 3 36,000 4 16,000 5 8,000 If the cost of capital is 10 percent, find the following: a. the NPV (10 points) b. the IRR (10 points) c. Payback (10 points) d. PI (10 points) e. Briefly describe a situation where you would use each one (15 points) Notes for assignments: Please make sure you show me how you have arrived at your calculations. For example, if you are using a formula in excel, make sure you show me the formula so that I can help you if you have done it wrong. (so I would want you to show me that you calculated the present value like this =PV(5%,60,-1000,0,0) so that I can see where you made a mistake. If you just give me the answer then I can't help you see where you went wrong. Also, be sure to be detailed in your answers. Net Present Value (NPV) and Internal Rate of Return (IRR) When it comes to calculating the net present value and internal rate of return, we are always talking about a series of payments that are uneven. After all, if the payment amount was the same we would just calculate the present value of an annuity (we covered that back in module 3). Net Present Value With the NPV, we are looking for a number; whereas with the IRR, we are looking for the return. NPV can be calculated on a financial calculator, in excel, or by hand. NPV is very simply the present value (PV) of Cash inflows minus the present value (PV) of Cash outflows. Let's look at an example. Let's assume that you want to consider an investment of $5,000, and you are currently making 11% on that money. The payments that you will receive over the next 5 years are: Year 1 Year 2 Year 3 Year 4 Year 5 Total $1500 $1000 $ 500 $ 500 $4000 $7500 So in total you will receive $7500. Payments Required rate of return Formula Present Value 0 1 1500 11% =1500/(1.11) 1,351.35 2 1000 11% =1000/(1.11)(1.11) 811.62 3 500 11% =500/(1.11)(1.11)(1.11) 365.60 4 500 11% =500/(1.11)(1.11)(1.11)(1.11) 329.37 5 4000 11% =4000/(1.11)(1.11)(1.11)(1.11)(1.11) 2,373.81 5231.74 So the total present value (PV) of the cash inflows is $5,231.74. Now you need to calculate the present value of the outflows. Since the outflow happened right at the beginning, there is nothing to calculate because it is already in today's dollars. PV of cash inflows Minus PV of cash outflows Net present value $5231.74 (5000.00) 231.74 So what does this mean? When the NPV is positive, it means that the internal rate of return is greater than the required rate of return, and therefore the investment should be accepted. If our required rate of return in this example, were 15%, then the net present value would calculate out to be ($336.17) or $4663.82 minus $5000. In that case you would not accept the investment because you aren't going to achieve your desired result. Payments 0 Required rate of return Present Value - 1 1500 15% 1,304.35 2 1000 15% 756.14 3 500 15% 328.76 4 500 15% 285.88 5 4000 15% 1,988.71 4,663.83 In excel, you enter the formula below: Rate is the required rate of return Value1... are the payments =NPV(rate,value1,value2,value3...) =NPV(11%,1500,1000,500,500,4000) $5,231.74 Please note that excel is giving you the present value of the cash inflows, you still need to subtract the present value of the cash outflow. Take the value calculated above and subtract the PV of the cash outflow 5231.74 -5000 NPV = 231.74 Internal Rate of Return (IRR) IRR is also known as dollar weighted return. IRR measures the total return based on cash inflows and outflows. I have included a sample Excel spreadsheet for calculating IRR, but I wanted to make sure that you understand how to calculate IRR. Personally, I use the dollar weighted return method or my financial calculate far more often because I think they are much easier to use. The dollar weighted return is a very simple spreadsheet to setup, use and understand. The fair market value and expected return are given numbers. To get the weighting of the portfolio you calculate that the stock is of the total and then multiply by the expected return. You repeat for all the investments to get your weighted return. Option A: Dollar Weighted Return Stock A B C Fair Market Value (FMV) 23000 15000 42000 80000 Expected Return 9.50% 12.90% 6.90% % of Portfolio 0.2875 0.1875 0.525 1 Weighted Return 2.73% 2.42% 3.62% 8.77% For, Internal rate of return I prefer to use my HP12C. Although any financial calculator will do, you will just have to look in your manual for the correct sequence. For the HP12C, IRR for the above example would be done as follows: Clear all Key in 9.5 hit enter Key in 23000 hit sigma + (this is the key in the bottom right corner to the left of the + sign) Key in 12.9 hit enter Key in 15000 hit sigma + Key in 6.9 hit enter Key in 42000 hit sigma + Hit the blue g key (located bottom right 3rd from left) Hit XW (the number 6 key) Answer comes up at 8.77

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction To Finance Markets, Investments, And Financial Management

Authors: Ronald W. Melicher, Edgar A. Norton

17th Edition

1119561175, 978-1119561170

More Books

Students also viewed these Finance questions