The Blake Computer Business is trying to choose between the following two mutually exclusive projects: (note this may be done in Excel!)
The cost of capital is 10%.
a. Calculate the payback period, IRR, MIRR, and NPV of each investment. For MIRR assume the reinvestment rate is equal to the companys cost of capital.
b. Assess the acceptability of each project based on each result in (a). That is, go through each answer and decide whether or not the project is acceptable under each models specific decision criteria.
c. Graph the NPV profiles of each investment. This needs to be done in Excel. You should present the discount rate on the x-axis (use a large array of potential discount rates) and the NPV should be on the y-axis. Both NPV profiles (for A and B) should be presented in the same graph.
d. Calculate the cross-over rate for these two projects.
e. Ultimately, which project would you recommend and why?Please be specific and detailed in your response.
2. a) Calculate the IRR of the following cash flows: -$550,000 in year 0; $430,000 in year 1; $100,000 in year 2; and $200,000 in year 3. Is the project acceptable if the cost of capital is 10%?
b) Now calculate the MIRR of the same cash flows assuming a reinvestment rate of 12%. Is the project acceptable or not acceptable under this methodology?
3. You are analyzing a project with the following projected cash flows:
The discount rate is 10%. What is the most appropriate capital budgeting method to use here to evaluate the project? Is the project acceptable? Why or why not?
4. Davis Inc. is considering buying a new machine for $5 million. This would replace an old machine that they had bought five years ago for $4 million. The old machine was being depreciated using the straight line method and had a 10 year useful life when it was first purchased. They could not sell it at this point since the old machine technology is obsolete. If Davis decides to buy the new machine and replace the old one, what is the change in capital expenditure for the investment?Note this is just asking what is the initial cash flow for this investment, and they are replacing the old machine with a new one. Davis tax rate is 25%.
5. Electric Youth, Inc. (EY) is a perfume manufacturer. The company is interested in buying a new perfume-filling machine to make a new type of perfume as a separate project for the firm. The new machine costs $1,000,000 and they typically use the straight-line method to depreciate their assets. They believe that with the new machine, revenues from this particular type of perfume will increase by $650,000 per year. Operating costs (not including depreciation) associated with the machine are estimated to be $300,000 per year. The project is expected to last for five years; this is also the useful life of the machine. When the project is complete, they plan to recycle the machine (which means it has a zero salvage value at the end of its useful life). They would need to make an immediate investment in inventory of $25,000, which would be unwound in the terminal year of the project. The tax rate for the firm is 22%. To do:
a) Calculate the cash flows (years 0 to 5) for this investment. You can do this in Excel if you would like (cut and paste into the Word document).
b) Given a cost of capital of 11%, calculate the NPV of this project. Show your work. Is this a good investment? Why or why not?
( MAKE SURE IT IS STEP BY STEP FOR EVERY PROBLEM AND NO EXCEL )
