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Tools Table Window Help FINC13 301,203 MID A Review View Tell me nces Mailings bccD 1 T ABCDE AaBb BbcaDB ABCD de Normal Number Small

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Tools Table Window Help FINC13 301,203 MID A Review View Tell me nces Mailings bccD 1 T ABCDE AaBb BbcaDB ABCD de Normal Number Small Text AO A Emphasis Heading 1 v Topic 2 - Capital Budgeting Question 2 (a) You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm's manufacturing facility. You find that the prior analysis ranked the proposals according to their IRR, and recommended the highest IRR option, Proposal A. You are concerned and decide to redo the analysis using NPV to determine whether this recommendation was appropriate. But while you are confident the IRRs were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not included in the report. For Proposal B, you cannot find information regarding the total initial investment that was required in year 0. And for Proposal C, you cannot find the data regarding additional salvage value that will be recovered in year 3. Here is the information you have: IRR Year 1 Year 3 Proposal Year 0 Year 2 -100 30 153 88 60% A 55% 0 0 206 95 B 50% -100 37 0 204 Suppose the appropriate cost of capital for each alternative is 10% (1) Using this information, determine the NPV of each project. Which project should the firm choose? Net present Value is (initial Investment) + - Drniert A. NDUTA.100 230/1.10.152111n Focus tates) 27 A G W MacBook Pro to E 21 . code AaBbCcDc Heading 1 Normal Number 2. Av Small Text Emphasis v Proposal IRR Year 0 Year 1 Year 2 Year 3 A 60% -100 30 153 88 55% B 0 0 206 95 50% -100 204 37 0 Suppose the appropriate cost of capital for each alternative is 10%. (i) Using this information, determine the NPV of each project. Which project should the firm choose? Net present Value is = (initial investment) + + Emo Project A: NPV(A)= -100+30/1.10 + 153/1.10 (ii) Why is ranking the projects by their IRR not valid in this situation? (iii) In what other situations will the IRR apprpach given conflicting or unreliable results. 1 [15 marks) Insert your answer here Page 5 of 13 Focus ed States) W BA . 27 Rook Pro (6) Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it. Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month. The cash flows from each of the businesses has approximately the same amount of risk. The business names, square footage requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall are provided below: Business Name Videos Now Gords Gym Pizza Warehouse Super Clips 30 1/2 Flavors S-Mart WalVerde Drugs Multigular Wireless Square Feet Expected Monthly Required Cash Flow 4,000 70,000 3,500 52,500 2,500 52,500 1,500 25,500 1,500 28,500 12,000 180.000 6,000 147500 1,000 22,250 d) If your new strip mall will have 15,000 square feet of retail space available to be leased, to which businesses should you lease and why? 11) If your new strip mall will have 16,000 square feet of retail space available to be leased, to which businesses should you lease and why? [15 marks) Insert your answer here Focus h (United States) W 27 MacBook Pro

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