Solution to this
5:18 b38dda77f2384d2b82039f8e4d08... Capital Budgeting Activity 2 Read the chapter 1 1 and answer the following questions: Marks 5 Q1:ABC Tourism is considering two alternative buses to transport people from the Metrostation to the main campus. Bus S has a cost of $5,000,000 and will produce end of year net cash flows of 2,500,000 per year for 3 years. Bus L will cost $7,500,000 and will produce cash flows of $ 2,200,00 per year for 6 years. The company must provide bus service for 6 years, after which it plans to give up its franchise and to cease operating the route. Inflation is not expected to affect either costs or revenues during the next 6 years. If ABC's cost of capital is 15%, which bus should be selected on the basis of NPV? Q2:A Business Project Required investment of $ 5 Million and have projected Cash flows for next 5 years as 2 million, 3.6 million, 2.4 million, 3 million and 4 million respectively. That project can partially be financed by obtaining a loan from bank @ 14% p.a. Calculate Payback Period, , NPV and IRR. Q3: You are asked to evaluate the following two projects for the Norton Corporation. Using the net present value method and profitability index approach, which project would you select, if the projects are mutually exclusive. Use a discount rate of 14 percent. Project X (Videotapes Project Y (Slow-Motion of the Weather Report Replays of Commercials) ($20,000 Investment) ($40,000 Investment fear Cash Flow Year Cash Flow $10,000 $20,000 2 8,000 2 . 13,000 3 9,000 3 . 14,000 8,600 16.000 Q4: A firm with a cost of capital of 10 percent is considering the following mutually exclusive projects Project A Cash flows Project B Years 0 $400M -$600M $55 $300 2 $55 $300 3 $55 $50 4 $225 $50 5 $225 $49 Required: Use above information to calculate Payback period . Discounted payback period . NPV . Profitability Index IRR b: If the projects are mutually exclusive, which project would you recommend? c: Notice that the projects have the same cash flow timing pattern. Why is there a conflict between NPV and IRR