Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 3 ( 1 2 marks ) Consider the following two mutually exclusive projects ( A and B ) . Whichever project you choose, if

Question 3(12 marks)
Consider the following two mutually exclusive projects (A and B).
Whichever project you choose, if any, you require a 10 percent return on your investment.
(a) Calculate the payback period for each project. (4 marks)
(b) Calculate the net present value (NPV) of each project (4 marks)
(c) Based on your answers in (a) and (b), which project will you finally choose? Explain.
(4 marks)
Question 4(15 marks)
Habibi Corporation is considering a new three-year project that requires an initial fixed
investment of $1,200,000. The fixed asset will be depreciated straight-line to zero over its
three-year tax life, after which time it will be worthless. The project requires an initial
investment in net working capital of $60,000 which will be recovered at the end of the project's
life. It is estimated to generate $750,000,$900,000 and $1,200,000 in annual sales in these 3
years. Besides, it is estimated that the costs will be $300,000,$400,000 and $500,000
respectively in these 3 years. The tax rate is 25 percent.
a. Prepare the Pro Forma Income Statements for Habibi Corporation in these 3 years. (3 marks)
b. Calculate the projected operating cash flows for Habibi Corporation in these 3 years. (3
marks)
c. Copy the following table to your answer sheet and fill in all the blanks. (6 marks)
d. Suppose the required return on the project is 15 percent. What is the net present value
(NPV) of the project? Explain whether the company should accept this project. (3 marks)
image text in transcribed

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

Theory Of Constraints Handbook

Authors: James Cox, John Schleier

1st Edition

0071665544, 978-0071665544

More Books

Students also viewed these Finance questions