[...] Calculating the internal rate of return (or IRR) of a project is one of the most popular methods that companies and managers use to determine whether a project is worth investing in. Now that I’ve covered a bit about NPVs and DCFs, it makes sense to go through what IRR is, how to use it, and why it’s not an ideal measurement. [...]

I’ve been trying to solve this problem for sometime with no success. I have also attempted using your information (How to calculate NPV) on the website, got close but still didnt get the solution.

Can you please help?

here is the question.

A fashion clothing company is considering investing in new machinery to improve its productivity over the next 5 years. You have been given the following information:

Sales are predicted to increase by $1,500,000 in year 1 and continue at this level.

The new machinery costs $10 million payable immediately.

It will be depreciated over 5 years on a straight line basis.

All the old machinery can be sold for $2 million.

The new equipment is more complicated and will cost $160,000 per year every year to maintain, as against the $100,000 for the old machines, but other running costs will be reduced by $120,000.

Finance for the purchase needs to be raised via a loan which requires annual interest payments of $300,000.

Wages will be reduced by $100,000 due to increased automation.

At the end of the five years the machinery will have a scrap value of $2million.

The feasibility study for this project (already completed and paid for) cost $200,000.

The cost of capital on investment appraisal for this level of risk is 7.5%.

Identify which of these items would be included in an NPV calculation and calculate the NPV. You may ignore tax and inflation.

an interesting and challenging question for students of finance. kindly provide solution to the question and forward a copy to my email. regards.

Hi,

Could you please help me solve the following problem.

Santa Monica Corp is considering the acquisition of a unit in France. Initial outlay = $4,000,000. It will reinvest all the earnings in the unit. It expects that at the end of 8 years, it will sell the unit for 12 million euros after capital gains taxes are paid. Spot rate of euro = $1.20. The company has no plans to hedge its exposure to exchange rate risk. The annualized U.S. interest rate = 5%. The annualized interest rate on euros = 7%. Assume that interest rate parity exists. Santa Monica’s cost of capital is 20 %. It plans to use the cash to make the acquisition.
Determine the NPV under these conditions.

Thanks,
Angela

Hey,

Need a little help on this one;

Ferry plc is considering a investment of R$.2,400,000( fixed Assets 2.000.000 and working capital of 400.000) subsidary is projected to acheive annual sales of R$1.600.00 and incur cash expenditures of 1.000.000 a year.

Projection states that after 4 years the subsidiary expects relisable value of R$ 800.000 and projects to sell the rights of the product for R$500.000.

Tax payable 35% payable in the same year. and Tax allowable depreciation of 25% on a straight line basis on all fixed assets.

Spot is R$:£ is 5:1

Annual Inflation rate R$: 5%
Annual Inflation rate £ :3%

cost of capital is 12%

Can anyone help me out on this one?

hope to hear from you,

Thanks, Theo

When to consider capital gain tax, how to calculate depreciation when an old machinery is replaced by a new one and the old machine has a scrap value. Which books will help me understand the concept of NPV and IRR better with solved examples of professional exams like CA, ICWA, CS etc..

I need help in this question, I am a little bit confused to which method I will be using and why? Please help.

Explain why strategic investment decisions are both important and difficult. Discuss the alternative approaches to the making of these decisions, identify the method that produces the best decision and justify your choice with a fully reasoned explanation.

Explain why strategic investment decisions are both important and difficult. Discuss the alternative approaches to the making of these decisions, identify the method that produces the best decision and justify your choice with a fully reasoned explanation.

I would appreciate your help with regards to this question. Thanks

Explain why strategic investment decisions are both important and difficult. Discuss the alternative approaches to the making of these decisions, identify the method that produces the best decision and justify your choice with a fully reasoned explanation.

I want to fuck you

Please explain me on the diffrences between NPV of corporate finance with the NPV of valuation properties.

now students like me have an opportuinity to get first hand information on handling calculations on finanances

Its very good and useful website

I have a question and I hope not to confuse in the proccess of explaining it.

I am taking a Financial Management class and my instructor is not very helpful. (to put it nicely)

The biggest problem is he is not explaining things very well. I don’t understand how a equation for NPV can return a correct number in the calculator and not in the excel spreadsheet. For example:

The chapter is chapter 11 the problem is 11-7. A firm with a 14 percent WACC is evaluating two projects for this year’s capital budget. After-tax cash inflows, including depreciation, are as follows:

Project A: Year0=-6000 Year1=2000 Year2=2000 Year3=2000 Year4=2000 Year5=2000

Project B: Year0=-18000 Year1=5600 Year2=5600 Year3=5600 Year4=5600 Year5=5600

Calculate NPV.

My instructor gets 866.16 for project A using the caculator.

I get 759.79 using the NPV formula in excel.

My instructor gets 1255.25 for project A using the caculator.

I get 1074.78 using the NPV formula in excel.

Why are my answers so different? Am I doing something wrong?

@LLL – The difference between what your instructor is calculating and what you’re getting has to do with timing the cash flows. Your instructor is assuming that “now” is Year 0, so s/he is calculating NPV based on a WACC of 14% and the 4 cash flows from Year 1-Year 5. Then s/he’s subtracting the outlay in Year 0 (so $6K in project A and $18K in project B) from the NPV figure. NPV has to do with “moving” cash flows between time periods. If you set up your excel by putting in each year’s cash flows in cells A1 through F1 and do an NPV calculation like this:

=NPV(14%,B1:F1)

and then subtract off A1, you’ll get the same figures your instructor is getting.

The way you’re calculating NPV, you’re assuming that Year 0 isn’t “now” but a year in the future. Just depends on how you or the problem is defined. Usually Year 0 reflects “now” so your instructor’s answers are probably what most people would be looking for and calculating.

please i need the mathematical formula for calculating NPV and IRR. thanks

how do you do this problem:

Doughboy Bakery would like to buy a new machine for putting icing and other toppings on pastries. These are now put on by hand. The machine that the bakery is considering costs $90,000 new. It would last the bakery for six years but would require a $7,500 overhaul at the end of the third year. After six years, the machine could be sold for $6,000. It would be fully depreciated over the six year life using straight-line depreciation for tax purposes.
The bakery estimates that it will cost $14,000 per year to operate the new machine and that there will be a working capital requirement of $20,000 that will be returned when the equipment is sold. The present manual method of putting toppings on the pastries costs $35,000 per year. In addition to reducing operating costs, the new machine will allow the bakery to increase its production of pastries by 5,000 packages per year. The bakery realizes a contribution margin of $0.60 per package. The bakery requires a 16% return on all investments in equipment. And the effective income tax rate is 30%.
1. What are the net annual cash inflows that will be provided by the new machine?
2. Compute the new machine’s net present value.

Discounting Cash Flows
Cafe Case Study

• Suppose you are thinking about starting a small café or canteen inside a university campus.
• You make a simple Feasibility Report showing the Estimated Initial Investment and the Forecasted Cash Flows for the first Year (based on expected Cash Receipts from sales and Cash Payments for expenses).
• The Key Financial Data is as follows:
– Initial Investment = Rs 100,000
– Forecasted Cash Receipts (end Year 1) = Rs 200,000
– Forecasted Cash Payments (end Year 1) = Rs 50,000
– Forecasted Future Investment (end Year 1)=Rs30,000
– Periodic Interest Rate (Opportunity Cost) = 10% p.a.

Calculate the Net Present Value for this business.
thanx,
ZAKIR KHAN MARWAT BBA
COMSATS UNIVERSITY
ABBOTTABAD

Hi

If looking on a new investment that is a replacement for equipment that a company already have, for exampel a new more efficiant machine, and the old machine can be sold for a some cash. Do I take the cashflow from selling the old machine into account when performing a incremental cash flow analysis on the new pice of machinery?

Kind regards Peter

please i need an ans to the question posted by moses kidane on the 1st of aug 2007.
please u can forward it to my email address (olusola_prevail@yahoo.com)

being trying to solve it just not getting thru. thanks

I’ve been trying to solve this problem for sometime with no success. I have tried using your solution methods,still did not get to the answer.

Pls can u help?

FGM plc, a motor manufacturer, is considering the launch of a new range of custom-built sports cars, incorporating a revolutionary design of automatic gearbox, which is claimed to be ultra fuel-efficient. The project is code-named project X.

The new key features of the gearbox have been patented by the inventor but he has approached FGM with a view to selling the patent rights. However he requires an early response before he offers the patent to competitors. The patent would cost £5 million.

Profit estimates have been prepared based on market research and these are detailed below. The time-scale to launch the new range on the market would be 2 years from any go-ahead date, with the required manufacturing investment decision having to be made 1 year from now.

If the project goes ahead, a new factory needs to be built, costing £2million plus £6 million for manufacturing equipment. In addition the land site for the factory is expected to cost £3 million.

The company’s depreciation policy is to use the straight-line method with residual values assumed to be zero. Land costs are not depreciated. Patent costs are amortised over the expected useful life of the patent, which in this case is 10 years.

The new range has an expected market life of 10 years. The useful life of both the factory and the equipment is also 10 years.

The project will be financed by a bank loan, which will incur interest of £300,000 per annum, payable in arrears at the end of each year, with the loan being repaid after 10 years.

The working capital for the project is estimated to be £1.2 million starting from the year of the product launch.

Profit Estimates

The profits shown below are after charging depreciation, interest on the bank loan.

Year Profit/(Loss) £m
1 (2.3)
2 1.5
3 6.0
4 8.0
5 10.0
6 10.0
7 8.0
8 6.0
9 4.0
10 2.0

The project detailed above is code-named Project X.

There is also an alternative proposal, code-named Project Y.

This project involves using gear-box technology, already created internally, from the company’s own engineering laboratory. This technology is estimated to have cost £3 million. However this technology is less advanced and therefore production could take place in the existing factory by putting on a night shift. Also only £4 million would need to be spent on equipment, the bank loan would be unnecessary and the working capital requirement would reduce to £0.8 million.

As for Project X, the time-scale to launch the new range on the market under Project Y would also be 2 years from any go-ahead date, with the required manufacturing investment decision having to be made 1 year from now.

The profit estimates for Project Y after charging depreciation on the new equipment, are estimated as follows:

Year Profit/(Loss) £m
1 2.1
2 3.6
3 3.6
4 3.6
5 2.6
6 2.6
7 2.6
8 1.6
9 1.6
10 0.6

The company’s money cost of capital is 15% p.a. Of this cost, 3% comprises allowance for inflation.

All cash figures are expressed in today’s money i.e. exclusive of inflation.

Required:

Using the information presented above, prepare a Report for the Directors.

The Report should include:

- Recommendation as to which (if any) of the projects should be implemented. The recommendation must be logically argued and supported with both quantitative and qualitative factors

- Identification of any areas where further work or information is required and clear explanation of why such work or information is necessary.

- Explanation of how risk has been taken into account in arriving at your recommendation.

- Identification and critical evaluation of any of the techniques you have used or have recommended using

– Explanation and justification of all adjustments made to profit estimates to arrive at cash flow estimates

- How “real options” have been taken into account

- How inflation has been taken into account
(60% weighting)

-Quantitative analysis in support of the Report and recommendations

(40% weighting)

I applaud your initiative in this website.I often come to read and try to solve some of the questions as training for myself.For better understanding,Kindly also send me a solution to the question from Angela Brown on the 17th of October 2008 regarding FGM Plc.
Regards.

Hi, please, can you help me… I need to know how to estimate the labor cost of a bakery that is rigth now starting, Ihave the cost of menu items, the food cost %, but I don´t know how to calculate the labor.
Thanks

I’ve been trying to solve this problem for sometime with no success. I have tried using your solution methods,still did not get to the answer.

Pls can u help?

FGM plc, a motor manufacturer, is considering the launch of a new range of custom-built sports cars, incorporating a revolutionary design of automatic gearbox, which is claimed to be ultra fuel-efficient. The project is code-named project X.

The new key features of the gearbox have been patented by the inventor but he has approached FGM with a view to selling the patent rights. However he requires an early response before he offers the patent to competitors. The patent would cost £5 million.

Profit estimates have been prepared based on market research and these are detailed below. The time-scale to launch the new range on the market would be 2 years from any go-ahead date, with the required manufacturing investment decision having to be made 1 year from now.

If the project goes ahead, a new factory needs to be built, costing £2million plus £6 million for manufacturing equipment. In addition the land site for the factory is expected to cost £3 million.

The company’s depreciation policy is to use the straight-line method with residual values assumed to be zero. Land costs are not depreciated. Patent costs are amortised over the expected useful life of the patent, which in this case is 10 years.

The new range has an expected market life of 10 years. The useful life of both the factory and the equipment is also 10 years.

The project will be financed by a bank loan, which will incur interest of £300,000 per annum, payable in arrears at the end of each year, with the loan being repaid after 10 years.

The working capital for the project is estimated to be £1.2 million starting from the year of the product launch.

Profit Estimates

The profits shown below are after charging depreciation, interest on the bank loan.

Year Profit/(Loss) £m
1 (2.3)
2 1.5
3 6.0
4 8.0
5 10.0
6 10.0
7 8.0
8 6.0
9 4.0
10 2.0

The project detailed above is code-named Project X.

There is also an alternative proposal, code-named Project Y.

This project involves using gear-box technology, already created internally, from the company’s own engineering laboratory. This technology is estimated to have cost £3 million. However this technology is less advanced and therefore production could take place in the existing factory by putting on a night shift. Also only £4 million would need to be spent on equipment, the bank loan would be unnecessary and the working capital requirement would reduce to £0.8 million.

As for Project X, the time-scale to launch the new range on the market under Project Y would also be 2 years from any go-ahead date, with the required manufacturing investment decision having to be made 1 year from now.

The profit estimates for Project Y after charging depreciation on the new equipment, are estimated as follows:

Year Profit/(Loss) £m
1 2.1
2 3.6
3 3.6
4 3.6
5 2.6
6 2.6
7 2.6
8 1.6
9 1.6
10 0.6

The company’s money cost of capital is 15% p.a. Of this cost, 3% comprises allowance for inflation.

All cash figures are expressed in today’s money i.e. exclusive of inflation.

Required:

Using the information presented above, prepare a Report for the Directors.

The Report should include:

- Recommendation as to which (if any) of the projects should be implemented. The recommendation must be logically argued and supported with both quantitative and qualitative factors

- Identification of any areas where further work or information is required and clear explanation of why such work or information is necessary.

- Explanation of how risk has been taken into account in arriving at your recommendation.

- Identification and critical evaluation of any of the techniques you have used or have recommended using

- Explanation and justification of all adjustments made to profit estimates to arrive at cash flow estimates

- How “real options” have been taken into account

- How inflation has been taken into account
(60% weighting)

-Quantitative analysis in support of the Report and recommendations

(40% weighting)

Hi,
Could you help me solve the following questions…
a)A machine will cost 100,000 dollars and will provide an annual cashflow of 30,000 for 6 years,the cost of capital is 15% and the tax bracket is 30%.The salvage value is after 6 years is 10,000,depreciation is a straight line
1.Calculate the net present value of the machine acquisition.
2. The internal rate of return
Should the machine be purchased?
b)A firm is considering 2 mutually exclusive projects
Project Yr1 Yr2 Yr3
A 25,000 5,000 25,000
B 28,000 12,672 12,672
a)Time cost of the capital is 12%.Compute the NPV and IRR at each point.
b)Why the project should be undertaken and why.

I’ve been trying to solve this problem for sometime with no success. I have tried using your solution methods,still did not get to the answer.

Pls can u help?

FGM plc, a motor manufacturer, is considering the launch of a new range of custom-built sports cars, incorporating a revolutionary design of automatic gearbox, which is claimed to be ultra fuel-efficient. The project is code-named project X.

The new key features of the gearbox have been patented by the inventor but he has approached FGM with a view to selling the patent rights. However he requires an early response before he offers the patent to competitors. The patent would cost £5 million.

Profit estimates have been prepared based on market research and these are detailed below. The time-scale to launch the new range on the market would be 2 years from any go-ahead date, with the required manufacturing investment decision having to be made 1 year from now.

If the project goes ahead, a new factory needs to be built, costing £2million plus £6 million for manufacturing equipment. In addition the land site for the factory is expected to cost £3 million.

The company’s depreciation policy is to use the straight-line method with residual values assumed to be zero. Land costs are not depreciated. Patent costs are amortised over the expected useful life of the patent, which in this case is 10 years.

The new range has an expected market life of 10 years. The useful life of both the factory and the equipment is also 10 years.

The project will be financed by a bank loan, which will incur interest of £300,000 per annum, payable in arrears at the end of each year, with the loan being repaid after 10 years.

The working capital for the project is estimated to be £1.2 million starting from the year of the product launch.

Profit Estimates

The profits shown below are after charging depreciation, interest on the bank loan.

Year Profit/(Loss) £m
1 (2.3)
2 1.5
3 6.0
4 8.0
5 10.0
6 10.0
7 8.0
8 6.0
9 4.0
10 2.0

The project detailed above is code-named Project X.

There is also an alternative proposal, code-named Project Y.

This project involves using gear-box technology, already created internally, from the company’s own engineering laboratory. This technology is estimated to have cost £3 million. However this technology is less advanced and therefore production could take place in the existing factory by putting on a night shift. Also only £4 million would need to be spent on equipment, the bank loan would be unnecessary and the working capital requirement would reduce to £0.8 million.

As for Project X, the time-scale to launch the new range on the market under Project Y would also be 2 years from any go-ahead date, with the required manufacturing investment decision having to be made 1 year from now.

The profit estimates for Project Y after charging depreciation on the new equipment, are estimated as follows:

Year Profit/(Loss) £m
1 2.1
2 3.6
3 3.6
4 3.6
5 2.6
6 2.6
7 2.6
8 1.6
9 1.6
10 0.6

The company’s money cost of capital is 15% p.a. Of this cost, 3% comprises allowance for inflation.

All cash figures are expressed in today’s money i.e. exclusive of inflation.

Required:

Using the information presented above, prepare a Report for the Directors.

The Report should include:

- Recommendation as to which (if any) of the projects should be implemented. The recommendation must be logically argued and supported with both quantitative and qualitative factors

- Identification of any areas where further work or information is required and clear explanation of why such work or information is necessary.

- Explanation of how risk has been taken into account in arriving at your recommendation.

- Identification and critical evaluation of any of the techniques you have used or have recommended using

- Explanation and justification of all adjustments made to profit estimates to arrive at cash flow estimates

- How “real options” have been taken into account

- How inflation has been taken into account
(60% weighting)

-Quantitative analysis in support of the Report and recommendations

(40% weighting)

please if anyone knows how to do this let me know

Chatman Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $787,200 is estimated to result in $262,400 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $114,800. The press also requires an initial investment in spare parts inventory of $32,800, along with an additional $4,920 in inventory for each succeeding year of the project. If the shop’s tax rate is 30 percent and its discount rate is 12 percent, the NPV for the project is $ and Chatman buy and install the machine press. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places, e.g. 32.16.)

this is the cost-cutting proposal and i have to find the NPV i know that should not buy the machine because the NPV is negative but i dont know what the NPV is someone help

Chatman Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $787,200 is estimated to result in $262,400 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $114,800. The press also requires an initial investment in spare parts inventory of $32,800, along with an additional $4,920 in inventory for each succeeding year of the project. If the shop’s tax rate is 30 percent and its discount rate is 12 percent, the NPV for the project is $ and Chatman buy and install the machine press. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places, e.g. 32.16.)

Thank you for your help on this site.Please i have a question similar to Angela Brown’s question.Could you please send me the answer to her question.Thanks

I’ve been trying to solve this problem for sometime with no success. I have tried using your solution methods,still did not get to the answer.

Pls can u help?

FGM plc, a motor manufacturer, is considering the launch of a new range of custom-built sports cars, incorporating a revolutionary design of automatic gearbox, which is claimed to be ultra fuel-efficient. The project is code-named project X.

The new key features of the gearbox have been patented by the inventor but he has approached FGM with a view to selling the patent rights. However he requires an early response before he offers the patent to competitors. The patent would cost £5 million.

Profit estimates have been prepared based on market research and these are detailed below. The time-scale to launch the new range on the market would be 2 years from any go-ahead date, with the required manufacturing investment decision having to be made 1 year from now.

If the project goes ahead, a new factory needs to be built, costing £2million plus £6 million for manufacturing equipment. In addition the land site for the factory is expected to cost £3 million.

The company’s depreciation policy is to use the straight-line method with residual values assumed to be zero. Land costs are not depreciated. Patent costs are amortised over the expected useful life of the patent, which in this case is 10 years.

The new range has an expected market life of 10 years. The useful life of both the factory and the equipment is also 10 years.

The project will be financed by a bank loan, which will incur interest of £300,000 per annum, payable in arrears at the end of each year, with the loan being repaid after 10 years.

The working capital for the project is estimated to be £1.2 million starting from the year of the product launch.

Profit Estimates

The profits shown below are after charging depreciation, interest on the bank loan.

Year Profit/(Loss) £m
1 (2.3)
2 1.5
3 6.0
4 8.0
5 10.0
6 10.0
7 8.0
8 6.0
9 4.0
10 2.0

The project detailed above is code-named Project X.

There is also an alternative proposal, code-named Project Y.

This project involves using gear-box technology, already created internally, from the company’s own engineering laboratory. This technology is estimated to have cost £3 million. However this technology is less advanced and therefore production could take place in the existing factory by putting on a night shift. Also only £4 million would need to be spent on equipment, the bank loan would be unnecessary and the working capital requirement would reduce to £0.8 million.

As for Project X, the time-scale to launch the new range on the market under Project Y would also be 2 years from any go-ahead date, with the required manufacturing investment decision having to be made 1 year from now.

The profit estimates for Project Y after charging depreciation on the new equipment, are estimated as follows:

Year Profit/(Loss) £m
1 2.1
2 3.6
3 3.6
4 3.6
5 2.6
6 2.6
7 2.6
8 1.6
9 1.6
10 0.6

The company’s money cost of capital is 15% p.a. Of this cost, 3% comprises allowance for inflation.

All cash figures are expressed in today’s money i.e. exclusive of inflation.

Required:

Using the information presented above, prepare a Report for the Directors.

The Report should include:

- Recommendation as to which (if any) of the projects should be implemented. The recommendation must be logically argued and supported with both quantitative and qualitative factors

- Identification of any areas where further work or information is required and clear explanation of why such work or information is necessary.

- Explanation of how risk has been taken into account in arriving at your recommendation.

- Identification and critical evaluation of any of the techniques you have used or have recommended using

- Explanation and justification of all adjustments made to profit estimates to arrive at cash flow estimates

- How “real options” have been taken into account

- How inflation has been taken into account
(60% weighting)

-Quantitative analysis in support of the Report and recommendations

(40% weightin

hi could u please help me out in solving this problem iam unable 2 do it i did something but not giving me any data about

FGM plc, a motor manufacturer, is considering the launch of a new range of custom-built sports cars, incorporating a revolutionary design of automatic gearbox, which is claimed to be ultra fuel-efficient. The project is code-named project X.

The new key features of the gearbox have been patented by the inventor but he has approached FGM with a view to selling the patent rights. However he requires an early response before he offers the patent to competitors. The patent would cost £5 million.

Profit estimates have been prepared based on market research and these are detailed below. The time-scale to launch the new range on the market would be 2 years from any go-ahead date, with the required manufacturing investment decision having to be made 1 year from now.

If the project goes ahead, a new factory needs to be built, costing £2million plus £6 million for manufacturing equipment. In addition the land site for the factory is expected to cost £3 million.

The company’s depreciation policy is to use the straight-line method with residual values assumed to be zero. Land costs are not depreciated. Patent costs are amortised over the expected useful life of the patent, which in this case is 10 years.

The new range has an expected market life of 10 years. The useful life of both the factory and the equipment is also 10 years.

The project will be financed by a bank loan, which will incur interest of £300,000 per annum, payable in arrears at the end of each year, with the loan being repaid after 10 years.

The working capital for the project is estimated to be £1.2 million starting from the year of the product launch.

Profit Estimates

The profits shown below are after charging depreciation, interest on the bank loan.

Year Profit/(Loss) £m
1 (2.3)
2 1.5
3 6.0
4 8.0
5 10.0
6 10.0
7 8.0
8 6.0
9 4.0
10 2.0

The project detailed above is code-named Project X.

There is also an alternative proposal, code-named Project Y.

This project involves using gear-box technology, already created internally, from the company’s own engineering laboratory. This technology is estimated to have cost £3 million. However this technology is less advanced and therefore production could take place in the existing factory by putting on a night shift. Also only £4 million would need to be spent on equipment, the bank loan would be unnecessary and the working capital requirement would reduce to £0.8 million.

As for Project X, the time-scale to launch the new range on the market under Project Y would also be 2 years from any go-ahead date, with the required manufacturing investment decision having to be made 1 year from now.

The profit estimates for Project Y after charging depreciation on the new equipment, are estimated as follows:

Year Profit/(Loss) £m
1 2.1
2 3.6
3 3.6
4 3.6
5 2.6
6 2.6
7 2.6
8 1.6
9 1.6
10 0.6

The company’s money cost of capital is 15% p.a. Of this cost, 3% comprises allowance for inflation.

All cash figures are expressed in today’s money i.e. exclusive of inflation.

Required:

Using the information presented above, prepare a Report for the Directors.

The Report should include:

- Recommendation as to which (if any) of the projects should be implemented. The recommendation must be logically argued and supported with both quantitative and qualitative factors

- Identification of any areas where further work or information is required and clear explanation of why such work or information is necessary.

- Explanation of how risk has been taken into account in arriving at your recommendation.

- Identification and critical evaluation of any of the techniques you have used or have recommended using

– Explanation and justification of all adjustments made to profit estimates to arrive at cash flow estimates

- How “real options” have been taken into account

- How inflation has been taken into account
(60% weighting)

- Quantitative analysis in support of the Report and recommendations

(40% weighting)

I have a problem with a financial accounting problem. I am clueless about it. can you help me please. here goes:
you are considering the purchase ofa speech recognition dictation system. Firm A requires an upfront payment of $250.00 and an annual maintenance payment of $37,000 at the time of the contract. thereafter maintenance payments of $37,000 are made at the beginningog each anniversary year for a total of 5 maintenance payments inculding the initial payment made at the time of purchase.

the other firm Firm B requires an up-front payment of $325,000 and an annual maintenance payment of $7,000 at the time of contract signing. Thereafter maintenance payments of $7,000 are made at the beginningof each anniverasy yaer fora total of 5 maintenance payments inculding the initial payment made at the time of purchase.

Installation and oather initial set up cost are estimated at $50.000 for either product. Both vendors quoted on iste training will cost $5,000 and will take place at time of implementation. No ongoing trraining cost was noted n eaither proposal becuse the $5,000 inludes training a trainer.

there is an average savings at year’s end is $105,000 per year. CFO will earn 5% interest on the hospital’s funds. He will not consider any project that yields less than a 20% return. useful life of the acquisition is 5 years.

a. claculate the net present value of each option show calculations
b. calculate the payback of each option show calculation
c. calculate the average rate of return of each option show calculations

Hello
Could You help me solve the following problem, please

Calculate the NPV of the following investment:
My company is evaluating the investment in a new plant, which will generate a 15,000000 US$ cash return each year for in coming 4 years ( from year1-to year 4).The operating costs will be equal to 5,000000 US$ each year ( from year1-to year 4), plus an initial investment of 35,000000 US$ in year 0. In year 4 the plant is forecasted to be sold for 15.000000 US$.
Please, calculate NPV of the investment using 10% as a discount rate.
Do I have to make this investment? Why?
Thank You very much! Best regards!

Could You help me in solving this following problem, please

Can you help me solve this problem pls.

Alpha Bank plans on offering a considerable two-year loan. Although this loan is not long-term oriented, it is potentially of significant value to the bank. As the bank’s Chief Risk Officer, you disagree with the Chief Finance Officer (CFO)’s view on this; in particular, you disagree as to whether this loan creates value for the bank, given its riskiness, and whether the risk management department can be allocated a % of the anticipated profits from this loan. The amount to be lent is £100M for 2 years.

Specifically, the terms of the loan are:

• 2-year to maturity loan of £100M with interest paid every year and principal of £100M at maturity
• Equity funding = 6%
• Cost of equity = 15%
• Interbank funding = 94%
• Corporate tax rate = 25%
• Libor = 10%
• Loan rate = 14%
• Probability of Default (PD) Year 1 = 0%
• Probability of Default Year (PD) 2 = 4%
• Recovery in case of default = 20% (or equivalently Loss Given Default = 80%)

Today, the issue is mainly in two-fold:
a) Does this loan create value for the bank given its risk characteristics?
b) Assuming that everything performed according to plan in the first year, then how much profit must be accrued? Given a few points of disagreement between you and the CFO, the Chief Executive has asked you both to present reports elaborating on your arguments.

Write a report of 2,000 based on the above data outlining your recommendations to the Chief Executive Officer.

Assume the risk-adjusted cost of capital is 10% and its tax rate is 40%. Compute the net present value (NPV) for each warehouse proposal. Include the cash flows from salvage value and the tax benefits of depreciation (assume 5-year straight-line). Incorporate the research data and graphs and charts into my presentation to support for my recommendations.Proposal 1 Proposal 2
New Warehouse Location North Warehouse West Warehouse
Estimated first year revenue increase $650,000 $900,000
Estimated annual revenue growth 7% 8%
Estimated variable costs % 45% 55%
Marginal tax rate 40% 40%
Estimated annual fixed costs $100,000 $120,000
Investment in facility $1,500,000 $1,700,000
One-time advertising in year 0 $140,000 $150,000
Estimated salvage value in year 6 $125,000 $120,000

i want to know how to calculate net present value

i need the solution of the same problem urgently.

I’ve been asked to do the calculations and till the dead line have no chances of asking more questions regarding it. I therefore hope i would get help from you.

Need to calculate the NPV for two cases when a company has (company X) 13% adjusted risk rate and (company Y) 15%.
The first one uses the current technology and the other one installes new.

Cost of capital is 12% and risk-free rate of interest 9%.

initiall investment in case X is 2700000 and the case Y 2100000.

Cash flows are:
X
470000
610000
950000
970000
1500000
Y
380000
700000
800000
600000
1200000

I would appreciate if you could help me on the issue.

Need help to solve this problem and understand how to tackle. Please let me know how soon can you provide an answer.

Manufacture of a printed circuit board product is to last 2 years. The work requires moving a printed circuit board mounted with electronic components in an assembly-line fashion. Two solution are proposed: A fixed belt conveyor costing $75000 is estimated to have an annual operating cost of $20000 and $15000 salvage value at the end of the second year. An alternate choice is mobile equipment costing $30000 and its estimated operating cost is 70000 annually. Salvage value of the mobile equipment is $10000 at the end of 2 years. These alternatives have a longer physical life than the project life.
a) Sketch the cash flow diagrams. Find the preferred method for an interest rate of 10%. Find the annual cost of both methods.
b) Repeat part (a) for 20%. Discuss the effects of raising the interest rate.

Hi there- trying to solve this problem – the backwards of NPV.

This is a sale that gets a certain sum up front and additional annual payments depending on contract. Depending on changing startup price, I need to calculate the annual future sums.
i.e.

Startup Price 35000
Renewal Price 15000
Length of Contract 5
Discount Rate 10%
NPV $82,547.98

No if I change the Startup price, how can I calculate the Renewal price?

Hi

I please need some help to solve this problem: a pharmaceutical company is considering developing a new drug, which if successful would give the company exclusive rights to produce and market the product. if successful, the firm will acquire a patent that gives it the xclusive right to produce the drug for the following 17years; assume that the corresponding 17 year Treasury-bond rate is 6%.

Financial analysis of the projects leads to the conclusion that the cost of developing the drug is $2.9 billion, while the investment is expected to produce a payoff equal to $3.4billion.

1-What is the projects’s NPV?

2-How confident should shareholders be as to indicated developement cost of an expected payoff from the firm’s R&D expenditure on this drug?

nice one

please help me.
ukooltd is considering an investment proposal which will yield a contribution margin of sh600,000 every year.the project will cost sh200,000,has a usefull life of 10 years and a neglible salvage value.the co.uses a straight-line depreciation method and is in 50%tax bracket.the opportunity cost of capital is 12%.
required:
determine the NPV if
1.a normal annual repair of sh 20,000 will be required after being in operation for 5 years .

2.the project requires an overhaul costing of sh 200,000at the end of the sixth year.

How can I calculate NPV if I have WACC, capital, year and average return per year?

With thanks

Yenki Ltd. is considering two mutually exclusive projects A and B. Project A costs
Rs. 30,000 and Project B Rs. 36,000. The
Please help me solve this question:

NPV probability distribution for each project is
as given below :
Project A Project B
NPV Estimate Probability NPV Estimate Probability
Rs. 3,000 0.1 Rs. 3,000 0.2
6,000 0.4 6,000 0.3
12,000 0.4 12,000 0.3
15,000 0.1 15,000 0.2
You are required to compute:
i) the expected Net Present Value of Projects A and B.
ii) The risk attached to each project i.e., Standard deviation of each probability distribution.
iii) The Profitability Index of each project.
Which project do you consider more risky and why?

Yenki Ltd. is considering two mutually exclusive projects A and B. Project A costs
Rs. 30,000 and Project B Rs. 36,000. The
Please help me solve this question:

NPV probability distribution for each project is
as given below :
Project A Project B
NPV Estimate Probability NPV Estimate Probability
Rs. 3,000 0.1 Rs. 3,000 0.2
6,000 0.4 6,000 0.3
12,000 0.4 12,000 0.3
15,000 0.1 15,000 0.2
You are required to compute:
i) the expected Net Present Value of Projects A and B.
ii) The risk attached to each project i.e., Standard deviation of each probability distribution.
iii) The Profitability Index of each project.
Which project do you consider more risky and why?

Yenki Ltd. is considering two mutually exclusive projects A and B. Project A costs
Rs. 30,000 and Project B Rs. 36,000. The
Please help me solve this question:

NPV probability distribution for each project is
as given below :
Project A Project B
NPV Estimate Probability NPV Estimate Probability
Rs. 3,000 0.1 Rs. 3,000 0.2
6,000 0.4 6,000 0.3
12,000 0.4 12,000 0.3
15,000 0.1 15,000 0.2
You are required to compute:
i) the expected Net Present Value of Projects A and B.
ii) The risk attached to each project i.e., Standard deviation of each probability distribution.
iii) The Profitability Index of each project.
Which project do you consider more risky and why?

Yenki Ltd. is considering two mutually exclusive projects A and B. Project A costs
Rs. 30,000 and Project B Rs. 36,000. The
Please help me solve this question:

NPV probability distribution for each project is
as given below :
Project A Project B
NPV Estimate Probability NPV Estimate Probability
Rs. 3,000 0.1 Rs. 3,000 0.2
6,000 0.4 6,000 0.3
12,000 0.4 12,000 0.3
15,000 0.1 15,000 0.2
You are required to compute:
i) the expected Net Present Value of Projects A and B.
ii) The risk attached to each project i.e., Standard deviation of each probability distribution.
iii) The Profitability Index of each project.
Which project do you consider more risky and why?

Hi can you please help me with this, quite urgent. Thank you ever so much.

Assume you are working in a bank and one of your clients, Pear Ltd., applies for a loan
required for an investment into a new laptop series. During the last meeting with Pear
Ltd. the CEO of Pear Ltd. has informed you about the financial data regarding this
investment. These data are as follows:

-Project duration: 3 years (i.e. the laptop will be produced for three years)

-Required amount for the investment now: £ 15,000,000

-Expected quantities to be sold: year one: 10,800, year two: 12,500, year three:

9,600

-Price to be charged per laptop: year one: £ 760, year two: £ 800, year three: £ 780

-Variable costs per laptop: £ 250

-Total fixed costs directly related to the investment: £ 130,000 per year

-Total fixed costs due to overheads of Pear Ltd.: £ 110,000 per year

-Depreciation: linear within three years, i.e. £ 5,000,000 pear year

-Tax rate on Pear Ltd.’s profit: 35 %

-Cash to be invested into the project by Pear Ltd.: £ 5,000,000

-Requested loan: £ 10,000,000

Assume that you trust in the data given above (i.e. this issue has not to be discussed) and
that the only reason to reject the loan is that the investment is not worthwhile as such.
Moreover, assume that the market rate of return for an investment in bonds backed up by
the British government is 4.0 % per year (before tax) and you have to pay 4.2 % per year
for the money which your treasury department in the bank can offer you. Given the costs
for granting the loan (incl. costs for risks) you need a margin of 0.80 % per year to cover
these costs. Furthermore, as most of the cost related to grant the loan are generated during
the decision making about the loan your internal rules require a fee of 1.25% of the loan
granted if the decision is positive.

Would you grant the loan? If yes, under what conditions? Explain and critically assess
your decision.

Kind Regards.

The company invests $10,000, it will be repaid in a single sum at the end of 10 years. During the first five years the investment grows by 15% (nominal), compounded monthly. During the second five years the rate is 18% growth (nominal), compunded quarterly. What is the internal rate of return (IRR) for the entire 10-years period? I’m stuck with this HM problem. Does anyone knows how to start this?

I could use help with a formula for NPV.
I am trying to use Excel to calculate the NPV of uneven cash flows over 39 years paid monthly.
These are annuity type payments.
They start at $1,336 per month.
I want to show them increasing at 2.5% each year for the 39 years.
So, first 12 months it’s $1,336 per month.
Next 12 months it’s $1,369.40.
In other words, the payment goes up 2.5% each successive year.
I have the formula for level payments
=1136*(1-(1/(1+.025)^468))/(.025/12)
It’s the increasing payments that throws me. I’m using Excel 2007.
Is there a formula that accomplishes this without having to input a whole table of values to reference?

thanks

Mike

Hi can you please help me with these 2 problems, quite urgent. Thank you so much.

A company wishes to assess whether it should lease or purchase outright a piece of plant, the following information is relevant:-

Purchase price of the plant £45000
Estimated life of 6 years
Expected residual value at the end of the 6 years is nil
The machine is expected to yield savings of £8000 per year
The machine can be leased at £6000 per year for 6 years
Money can be invested at 8% on the open markets
The company considers the rate of return for such an investment to be 10%

Using the Net Present Value method calculate the following:-

a) should the company lease or buy outright
b) at which investment rate would the choice become immaterial
c) approximately what would be the minimum annual lease cost
d) approximately at which initial outlay would purchase become favourable

2A company is considering the acquisition of new equipment. The terms of acquisition are

(a) initial payment of £150000

(b) followed by annual payments of £60000 in each of the next 5 years. At the end of the fifth year the machinery is to be bought outright for a further payment of £180000.

The machine is expected to provide a further 5 years of useful life before replacement becomes necessary, disposal costs of £75000 are expected. The new equipment is expected to provide operational savings of £110000 per year throughout its life. The cost of capital is 10%

Using Net Present Value:-

a) decide if the company should go ahead with the acquisition

b) what would be the lowest acceptable level of annual savings

c) What is the Internal Rate of Return for this project

please help mee out in solving these problems i am gettng screwed up byy these
thanking all for dis big big help

Hi,
I just wanted to say thank you. Your thinking of timeless reference has been great. I have been struggling with my finance class not understanding. Your examples were easy to understand and I think I can do this on my own.
Thanks Again,
Dani Medina

It is a good site. I can see the questions only. Where are the replies?

Many thanks. I will appreciate the answers to the questions that have been posed.

I need help with an assignment, hope you can assist. It says:-

The purchase price of a machine is 500,000, depreciated on straight line over 5 years. Cash saving of 200,000 per annum before tax for 5 years. The machine will be sold for 75,000. Gain on the sale taxed at 40%. Is the investment attractive given all the cash flows. Assume that the cash flow happened at the end of each year. Tax rate=40%, appropriate discount rate = 8%. What is the NPV?, IRR and payback period. Hope to hear from you.

Hi

Can you please assist me with this one :

Terminator Pest Control Limited projects unit sales for a new household-use laser-guided cockroach eradication system as follows:

Year Unit Sales
1 100000
2 105000
3 110000
4 114000
5 80000

The eradication system will require $600 000 in net working capital (NWC) to start, and additional net working capital investments each year equal to 40 per cent of the projected sales increase for the following year. (Since sales are expected to fall in year 5 then, there is no NWC cash flow occurring for year 4.)
Total fixed costs are R200000 per year, variable production costs are R200 per unit, and the units are priced at R325 each. The equipment needed to begin production has an installed cost of R13 250 000. This equipment is to be depreciated for tax purposes over six years. At the end of the expected project life of five years this equipment can probably be sold for about 25% of its acquisition cost. The company pay
35% tax and has a required return on all its projects of 25%.

Based on these preliminary project
estimates, what is the NPV and IRR of the project?

projection with 50 million dollar investment in a airline business

Company iz investing 50 million which will results an incremental sales of 2 million in 1st year after the fleet has been launch.
The inflation rate is 10% use straight line method for 5 years.
and calculate NPV of project. The tax rate assume to be 35% . Calculate the cash flow.

Dear, Great full if you do not mind to help me with these two problems please.

1) a machine man is considering a four-year project to improve its productivity effeciency. Buying a new machine press for $480,000 is estimated to result in 4160,000 in annual pretex cost savings. the press falls in the MARCS fiveyear class, and it willhave a salvage value at the end of the project of $70, 000. the press also requires an initial investment in spare parts inventory of $20,000. along with an additional $3000 in inventory for each succeeding year of the project. if the shop’s tax rate is 35 percent and its discount rate is 15 recent, should him buy and install the machine press?

2) Calculating Project NPV – A restaurant is considering the purchase of a $10,000 souffle maker. the souffle maker has an economic life of five years and will be fully depreciated by the staright-line method. The machine will produce 2,000 souffles per year, with each costing $2 to make and price at $5. Assume that the discount rate is 15 percent and the tax rate is 34 percent. Should the restaurant make the purchase?

Thanks.

Please help me with this Question:

As part of the drive to reduce costs and increase profitability a company is considering investing in new manufacturing equipment. This equipment will require a large initial outlay and will result in positive cash inflows for the four-year useful life. The company commissioned and paid for a report by management consultants last year at a cost of £50,000 which forecast the following information on the equipment.

1. The equipment will cost £2,000,000. It can be sold after four years for £200,000 and should be depreciated at 25% per annum using the straight line basis. Capital allowances are available at 15% on a straight line basis.
2. An initial investment in working capital of £50,000 is required. This will be maintained for the four years. At the end of the four year period this will be recovered.
3. Production efficiencies of £500,000 per annum are expected in year 1 and these will grow at 3% per annum thereafter.
4. Annual savings on labour are expected to amount to £150,000 in year 1 growing at a rate of 5% per annum for each of the next three years.
5. The managing director of the company has indicated that £200,000 of existing head office costs will be allocated to the new machinery.
6. The rooms where the plant will be located is currently let out to a local business for £25,000 per annum.
7. The company pays corporation tax at the rate of 12.5% payable one year in arrears.
8. The company has a weighted average cost of capital of 10%. This was last calculated 3 years ago.

Requirement:

a) Calculate the NPV of the proposed project and justify your treatment of each cost referred to in the question.
12 Marks
b) Calculate 3 alternative methods of appraising this investment, explain each method and highlight the disadvantages of each relative to the NPV method.
12 Marks

Help!! I’m a grad student in managerial accounting and I never had to take an accounting class before. Here’s the scenario:

A company is considering the purchase of new equipment to manufacture specailty spark plugs. The new equipment would allow the firm to manufacture 100,m000 additional spark plugs per year and is expect to have a useful life of 5 yeas and to have no salvage value at that time. SAC will depreciate the equipment using the straight-line method. Specialty spark plugs are selling for an average price of $20 and are expected to cost $8 to manufacture with the new equipment. Indirect costs are expect to remain the same. The equipment will cost $3 million to purchase and install.

The company intends to keep its capital structure intact in financing this equipment.

Capital Structure:

Stocks: % of capital-60%. Rate of return-14%

Bonds- % of capital 40%. Ratue of return- 6%

Is this a good investment for the company? What is it’s NPV and IRR. I have no idea what I’m doing.

PS. SAC’s tax rate is 34%

How to calculate the NPV for year 1 2 & 3 as I have the following data.

Month Assumption 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

No. of Operators 5 5 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
Call hours 1 200 500 875 1050 1225 1400 1575 1750 1925 2100 2275 2450 2625 2800 2975 3150 3325 3500 3675 3850 4025 4200 4375 4550 4725 4900 5075 5250 5425 5600 5775 5950 6125 6300

In-flow
Capital 500.00
Loan 2 400.00
Revenue 3 15.00 37.50 65.63 78.75 91.88 105.00 118.13 131.25 144.38 157.50 170.63 183.75 196.88 210.00 223.13 236.25 249.38 262.50 275.63 288.75 301.88 315.00 328.13 341.25 354.38 367.50 380.63 393.75 406.88 420.00 433.13 446.25 459.38 472.50
Total Cash Inflow 500.00 – – 415.00 37.50 65.63 78.75 91.88 105.00 118.13 131.25 144.38 157.50 170.63 183.75 196.88 210.00 223.13 236.25 249.38 262.50 275.63 288.75 301.88 315.00 328.13 341.25 354.38 367.50 380.63 393.75 406.88 420.00 433.13 446.25 459.38 472.50

Out-flow
Loan-payback 2 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00 20.00
Purchase & support 4 150.00 150.00 15.00 15.00
Office rent 5 100.00 100.00 100.00 100.00 100.00 100.00
Support Salaries 6 23.00 39.00 42.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 65.00 65.00 65.00 65.00 65.00 65.00 75.00 75.00 75.00 75.00 75.00 75.00 75.00 75.00 75.00 75.00 75.00 75.00 75.00
Operators Salaries 6 25.00 25.00 25.00 30.00 35.00 40.00 45.00 50.00 55.00 60.00 65.00 70.00 75.00 80.00 85.00 90.00 95.00 100.00 105.00 110.00 115.00 120.00 125.00 130.00 135.00 140.00 145.00 150.00 155.00 160.00 165.00 170.00 175.00 180.00
Phone Bill 7 1.20 3.00 5.25 6.30 7.35 8.40 9.45 10.50 11.55 12.60 13.65 14.70 15.75 16.80 17.85 18.90 19.95 21.00 22.05 23.10 24.15 25.20 26.25 27.30 28.35 29.40 30.45 31.50 32.55 33.60 34.65 35.70 36.75 37.80
Other expenses 8 50.00 20.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
Total Cash outflow 73.00 309.00 42.00 231.20 83.00 85.25 91.30 197.35 103.40 109.45 115.50 121.55 127.60 233.65 139.70 180.75 171.80 177.85 198.90 304.95 211.00 217.05 223.10 229.15 245.20 351.25 257.30 278.35 269.40 275.45 281.50 387.55 293.60 299.65 305.70 311.75 317.80

Cumulative Net Cash 427.00 118.00 76.00 259.80 214.30 194.68 182.13 76.65 78.25 86.93 102.68 125.50 155.40 92.38 136.43 152.55 190.76 236.04 273.39 217.82 269.33 327.91 393.56 466.29 536.10 512.98 596.93 672.96 771.07 876.25 988.50 1,007.83 1,134.24 1,267.72 1,408.27 1,555.90 1,710.61

Hi, I need help in this question when doing the report. can you help me to interpret it?
“as there are no capital allowances tax is not an issue in deciding whether to go forward with the project”
as i know the tax will affect the result of the project and it is an issue, but in this question whether have or dont have tax the result is same. so how i insist my opinion that tax is an issue??

Smart Limited is an expanding company that makes a range of garden equipment and tools. The company is looking to update its range of cordless Hedge Trimmers by the introduction of a new product called the SuperStrimmie.

Initial outlay

If Smart Limited decides to proceed with the production of the SuperStrimmie, it will require an investment of £4,200,000 in a new machine. This machine will have a useful life of five years at which point the company believes it can be sold for £500,000. Depreciation is calculated on a straight line basis over the five years.

Demand and price

The SuperStrimmie is to be competitively priced at £70.00.
The sales and marketing director has already commissioned some preliminary market research at a cost of £140,000 and the results of this research suggest that likely demand for the new SuperStrimmie at this price will be as follows:

Year Demand
(units)
1 66,000
2 58,000
3 48,000
4 46,000
5 38,000

Costs:

The production manager and the finance director have spent considerable time analysing likely costs and they have arrived at the following:

Variable costs
Direct materials £14
Direct labour £8
Other variable costs £7
Total £29

In addition the SuperStrimmie will require an electric motor. The unit cost of making the electric motors in-house is as follows:

Materials (variable) £8
Labour (variable) £7
Total £15

If the electric motor is produced in-house, incremental fixed costs will increase by £35,000 per year.

A competitive bidding process has established that production of the motor for the SuperStrimmie could be sub-contracted to another supplier for the next five years. Any contract would run for the full, five year life of the SuperStrimmie. The unit cost charged by the supplier will depend on annual volume supplied as follows:

Annual volume (units) Sub-contract cost of the electric motor

0 – 50,000 £17
50,001 – 60,000 £16
60,001 – 70,000 £13

Batch related costs

The production manager has undertaken a costing exercise and has established that the SuperStrimmie will have the following batch related costs. These costs ‘vary’ each time a batch, or part batch, of the SuperStrimmie is produced.

SuperStrimmie
Machine Set-up costs per production run: £1200
Number of units per production run: 1,000
Quality assurance costs per 2,000 units produced £1,400

Incremental fixed costs

Other incremental maintenance and fixed costs associated with producing the new SuperStrimmie product are:

Cost per year:
years 1 and 2 Cost per year:
years 3 to 5
Machine maintenance costs £14,000 £26,000
Other fixed costs £62,000 £44,000

Impact on an existing product

The Sales and Marketing Director estimates that the introduction of the SuperStrimmie will affect demand of an existing product; the TimMie. Demand for the TimMie will reduce by 5% of the estimated volume of the SuperStrimmie in each year.

The unit contribution of the TimMie is £25.

Other information

Ignore inflation and taxation.

Assume the company’s cost of capital is 10%

What you need to do:

1) You should undertake a financial evaluation of whether the electric motor for the new SuperStrimmie should be subcontracted or produced internally.

2) Based on the decision you reach in part 1) together with the other data provided, calculate the:

Net Present Value (NPV), Internal Rate of Return (IRR), & Payback Period and the Accounting Rate of Return for the above project.

3) The Managing Director of Smart Limited has also asked you to prepare a product profit statement for each of the five years as follows:

Total Contribution from SuperStrimmie XXX
Lost Contribution from the TimMie (XXX)
Net Contribution XXX
Less batch related costs (XXX)
Less other incremental fixed costs (XXX)
Net Product cash flow XXX
Product depreciation (XXX)
Product Profit/(loss) after depreciation

need help in this one
Assume that a customer shops at a local grocery store spending an average of $150 a week and that the retailer earns a 5% margin. Calculate the customer lifetime value of this shopper remains loyal over a 10 yrs lifespan, assuming a 5% annual interest rate and no initial cost to acquire the customer

how to calculate

Caltech is considering the purchase of a new printing press. The
total installed cost of the press is R2.2 million. This outlay would
be partially offset by the sale of an existing press. The old press
has zero book value, cost R1 million 10 years ago, and can be
sold currently for R1.2 million before taxes. As a result of
acquisition of the new press, sales in each of the next 5 years
are expected to be R1.6 million higher than with the existing
press, but product cost (excluding depreciation) will represent
50% of sales. The new press will be depreciated on a straightline
basis over 5 years and will be terminated at end of 5th year
for a scrap value of R90 000 . Caltech cost capital is 11%.
Assume a 29% tax rate.

initial investment
operating cash flow
terminal cash flow
NVP
IRR
Payback period

I am having trouble trying to figure out how to set up present and future vaues using excel.
He is the problem I am working on.

On January 1, 2009, James Corporation sold a $500,000, 7% bond issue dated January 1, 2009. The market interest rate on January 1, 2009, was 10%. The bonds pay interest each December 31, and mature December 31, 2018. James Corporation uses the effective-interest method of amortization.

Answer the following questions in Excel and submit your completed Excel file. Round calculated amounts to the nearest dollars.

Compute the bond issue price using the present value tables provided in Appendix C pages C-14 through C-16. The present value factors from the tables should be rounded to 4 decimal places when you use them in your calculations. Show your present value calculations.

Prepare a bond amortization schedule for these bonds using the format shown in supplement 14B.

In your amortization schedule, you may need to adjust your interest expense slightly in the last interest period due to the effects of rounding in the problem. If needed, you will adjust the interest expense so the ending balance of the unamortized bond discount or premium is exactly zero at the end of the last interest period.

Prepare the journal entry to record the issuance of the bonds on January 1, 2009.

Prepare the journal entry to record the interest payment on December 31, 2009.
Can you please help me?

please help;

Cross Co. is able to sell one of its two machines. Both machines perform the same function but differ in age.

The newer machine can be sold today for $40,000. Its operating costs are $20,000 a year, but in 5 years the machine will require a $50,000 overhaul. Thereafter operating cost will be $30,000 a year until the machine is finally sold in year 10 for $5,000.

The older machine can be sold today for $20,000. If it is kept, it will need an immediate $20,000 overhaul. After that the operating costs will be $30,000 a year until the machine is finally sold in year 5 for $5,000.

Both machines are fully deprecitated for tax purposes. The company pays 35% tax on the gain from selling a machine. Cash flows have been forecasted in real terms, and the cost of capital is 12%.

Which machine should Cross Co. sell?

Leslie or anyone interested

could you kindly post the answers of the above questions here or email me them, as they would be a useful revision tool.

Thank you for this great website

Owen

will u help me on this one.. opus company is evaluating a capital investment proposal that requires an initial outlay of P200,000. The project will have a five-year life. net after-tax cash flows of the project are projected to be P80,000 in the first year, P60,000 in the second year, P52,000 in the third year, P32,000 in the fourth year, P36,000 in the fifth year, including the salvage value of P12,000 that is expected to be received at the end of the life of the project. The straight-line method will be used to depreciate the project. Income tax is 30% and the company’s cost of capital is 14%.
REQUIRED: Compute the net present value.

Plz help me out on the following problem, i am trying to work it out, but not succeed. Plz need ur help.

A company is considering purchasing a machine at a cost of $90,000. The machine is forecast to generate cash flow savings of $24,000 per year over an estimated useful life of six years and to have a salvage value after six year of $6,000. For tax purposes the machine can be depreciated at 20% per annum straight line method or 30% per annum reducing balance method (with no salvage allowance in either case). The company tax rate is 30% and the discount rate for evaluating projects of this type 12%. Apart from the initial outlay of $90,000, all cash flows (including tax payments and benefits) are assumed to occur at year end.

Req:1 What is the NPV and Internal Rate of Return of the project using straight line method.

Req:2 What is the NPV and Internal Rate of Return of the project using reducing balance method.

Plz i m waiting your reply soon.

Thx

Jimmy

Hello,

I’m just entering into the University for the business, anyone can help to give some clues on this question?

A firm has undertaken a feasibility study to evaluate a project that has the following estimated cashflows:

o Increased sales to business of $140,000 for the next 5 years (starting in one year’s time)

o Increased costs of $20,000 for the next two years (starting in one year’s time)

o The initial capital expenditure required is $100,000.

o The study cost $10,000 to conduct.

-Amount borrowed to fund project is $200,000 with interest of 8% pa paid yearly.

If the firm is facing a discount rate of 10%, what is the NPV of this project?

Many thanks for your kind assistance.

Hi..please help me solve these problems..
1. M/s Gas Ltd. Have estimated the following probabilities for net cash flows generated by a project. You are required to calculate the present value of the expected monetary cash flows at 10% discount rates. The following information has been made available to you:
1st Year 2nd Year
Cash Inflow ProbabilityCash . Probability
100 .10 100 .20
200 .20 200 .30
300 .30 300 .40
400 .40 400 .10

Hi!

I just want to ask your thoughts on the option of either purchasing company cars or continue leasing cars from an external entity. Which is more beneficial to the company?

Thanks!

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Kindly help me to solve this problem:

Volga is a large manufacturing company in the private sector. In 2007 the company had a gross sale of Rs. 980.2 crore. The other financial data for the company are given below:

Items In crores
Networth 152.31
Borrowing 165.47
EBIT 43.17
Interest 34.39
Fixed cost (excld interest) 118.23
Pls calculate the
1. Debt equity ratio
2. Operating leverage
3. Financial leverage
4. Combined leverage.

Java Café is considering two possible expansion plans. Plan A is to open 8 cafés at a cost of $4 180 000. Expected annual net cash inflows are $780 000, with residual value of $820 000 at the end of seven years.
Under plan B, Java Café would open 12 cafés at a cost of $4 200 000. This investment is expected to generate net cash inflows of $994 000 each year for seven years, which is the estimated useful life of the properties. Estimated residual value of the plan B cafés is zero. Java Café uses straight-line depreciation and requires an annual return of 14%.

Required
1. Calculate the payback period, the accounting rate of return, and the net present value of each plan. Use the residual value when calculating the accounting rate of return, but assume a zero residual value when calculating the net present values. What are the strengths and weaknesses of these capital budgeting models?

2. Which expansion plan should Java Café adopt? Why?

The company is expected to expand its business in to a new region with an initial investment of $100 million. They expect to generate cash flow in year 1 and revenue is expected to increase by $25 million per year (attributable to this new project). The company estimates fixed cost associated with the expansion to be $5 million per year and variable costs will be 70% of revenue. For accounting purposes, the initial investment will be depreciated on a straight line basis for 15 years. Loblaw will pay taxes in Canada and it will be 40%.

1. Calculate the NPV of this project.

2. Calculate the accounting break-even sales and NPV break-even sales of the project.

3.
3. Calculate the Economic Value Added break-even sales and comment on the difference between accounting break-even sales and the break-even identified through Economic Value Added.

Hi
Your site is really useful to those international students who are really starting this subject but are unknown to the practice.
Thanks!

How to evaluate the net presest value if the outlays are given different?

ap ltd trying to evaluate 4 new project. assume all 4 project have useful life of 10 years.the project are mutually exclusive.
project: 1 2 3 4
annual netcash flow:100000 70000 E G
initial investment: 449400 C 200000 300000
cost of capital: 14% 14% F 12%
IRR: A 20% 14% H
NPV: B D 35624 39000
calculate A B C D E F G H from the above.
its urgent..plz show me the required step and details to do it..

Hi I’ve been trying to solve the folowing problem, I really need help

As the finance manager of ADC LTD, one year ago you made a recommendation to the managing director that the company should purchase an advanced electronic device for £17,000 expecting it to have a productive life of four years and then to have a scrap value of £1,000. It has been depreciated on the usual straight-line method for one year and thus has a book value of £13,000.

You have just found that an even better machine has just come on the market. It would cost £20,000 and, after a three-year productive life, would have a scrap value of £2,000. The attraction is that it would reduce operating costs by £5,000 per annum. There is an obvious problem with the first machine, but the manufacturers of the new machine will give a trade-in allowance of £7,000 for the old one. You have just made a recommendation to the managing director that the old machine should be disposed of now, and a new machine installed.

You get something of a shock when the managing director sends you a rather sharp memo:

“On your recommendation, £17,000 was recently spent on an electronic device. Now you want us to spend a further £20,000 on another machine and to abanden the first before it has hardly been installed. It must be obvious to you that:

the cost of the new machine is more than the 3 x £5,000 savings that it will generate in its lifetime

you have forgotten that depreciation will rise from £4,000 per annum on the present machine to £6,000 per annum on the new machine, knocking the savings down to a lower figure than you have calculated

we will face a big loss of £6,000 on disposal of the present machine since its book value is £13,000 and the trade-in allowance is £7,000.

There is clearly no chance at all of achieving our normal 10% return, even if we forget all taxation effects. Whatever were you thinking about?”

You are required to compose a reply to the managing director, addressing each of the above comments.

I have one question. I have this assignment. I have to prepare th cash flows and the NPV. I would like to if I would like the renovations, do I completely vacat the bldg and get the renovations? I would like help in calculating the cashflows.

Tnx
Jamli

I have one question. I have this assignment. I have to prepare th cash flows and the NPV. I would like to if I would like the renovations, do I completely vacat the bldg and get the renovations? I would like help in calculating the cashflows.

ABC Construction and Leasing Company is interested in investing in the residential real estate market due to a relatively low interest rate environment. The Company appointed you to be in charge of the project feasibility study. You have just visited a 35-year old, well-managed residential apartment building in a Toronto downtown area which is for sale. The apartment is fully occupied with 400 tenants, and the current average renter pays $2,000 per month. However you are not sure whether this investment will provide you with adequate returns for the risk you are taking. Please perform analysis using everything you learned from Corporate Finance 2.
If you acquire the building, you consider the alteration of each suite’s layout to provide more generous living space and a better balance of living and bedroom accommodation. If you renovate the place, a monthly average rental income of $2,500 per month is expected. The estimated renovation cost is $10,000,000. If you renovate the place, you expect to fully occupy the building with the lease term of 5 years. You need to do some analysis whether it makes economic sense to spend additional capital for the renovation.
You would like to sell the apartment after 5 years. If you do not renovate the apartment, then the rental agreement you would get from renters would be typically one year and thus, are expose to vacancy risk when the term is expired annually.
The purchase price is expected to be $90 million before the renovation.

You haven’t decided how to raise the necessary capital to purchase the property, but what you are clearly is that you cannot issue more than 30% of the acquisition cost with common stock due to potential dilution effects thus, you need to rely on external debt funding for the remainder. The Company’s equity cost is 13%, and its cost of debt is Prime rate plus 2%.

Tnx
Jamli

I need help with the above. If anyone help me start off , I would very much appreciate.

Hiya there

I am working on trying to establish the potential NPV of a project to a mining company I have invested in – they are mining Iron Ore;

Reosurce size; 1.5 – 3million tonnes of DSO/Iron Ore

Future price of DSO per tonne – average; $175 – $200

Cost of production per tonne; $60 – 75

Capital costs; $40million

Royalties; 4%

Taxes; 40%

The compnay also has 677million shares in issue, and have strong backing with future funding issues covered by a significant Chinese backer.

Any thoughts on the above? NPV?

Also – how do I calculate possible value per share? ( Current Share price 4.875p – leading to a market capitalisation of aorund £32.5million )…

Huge, huge thanks in advance!!!

I should that I am applying a discount rate of 10%…this is to be on the rather safe side…

working on HW assignment & need assistance. need to calculate NPV for a 10 yr period.
Equipment cost, 4 mil. total Add’t cost, 500,000, working capital 250,000. salvage is 100,00.
the question i have is do I spread the salvage cost through out the 10 yrs period.

I am trying to figure out how to calculate the NPV for this question, but am having many difficulties. Please help.

Bunyan Lumber, LLC, harvests timber and delivers logs to timber mills for sale. The company was founded 70 years ago by Pete Bunyan. The current CEO is Paula Bunyan, the granddaughter of the founder. The company is currently evaluating a 7,500 acre forest it owns in Oregon. Paula has asked Steve Boles, the company’s finance officer, to evaluate the project. Paula’s concern is when the company should harvest the timber. 

Lumber is sold by the company for its “pond value”. Pond value is the amount a mill will pay for a log delivered to the mill location. The price paid for logs delivered to a mill is quoted in dollars per thousands of board feet (MBF), and the price depends on the grade of the logs. The forest Bunyan Lumber is evaluating was planted by the company 20 years ago and is made up entirely of Douglas fir trees. The table below shows the current price per MBF for the three grades of timber the company feels will come from the stand: 


Timber Grade Price Per MBF 

1P $575 

2P 555 

3P 530 


Steve believes that the pond value of lumber will increase at the inflation rate. The company is planning to thin the forest today, and it expects to realize a positive cash flow of $450 per acre from thinning. The thinning is done to increase the growth rate of the remaining trees, and it is always done 20 years following a planting. 


The major decision the company faces is when to log the forest. When the company logs the forest, it will immediately replant saplings, which will allow for a future harvest. The longer the forest is allowed to grow, the larger the harvest becomes per acre. Additionally, an older forest has a higher grade of timber. Steve has compiled the following table with the expected harvest per acre in thousands of board feet, along with the breakdown of the timber grade: 


Years from today Harvest
(MBF) Timber Grade 
to begin harvest per acre
1P 2P 3P 


20 7.2 15% 42% 43%
25 9.4 18 49 33
30 11.3 20 51 29
35 12.2 22 53 25


The company expects to lose 5% of the timber it cuts due to defects and breakage. 


The forest will be clear-cut when the company harvests the timber. This method of harvesting allows for faster growth of replanted trees. All of the harvesting, processing, replanting, and transportation are to be handled by subcontractors hired by Bunyan Lumber. The cost of the logging is expected to be $155 per MBF. A road system has to be constructed and is expected to cost $60 per MBF on average. Sales preparation and administrative costs, excluding office overhead costs, are expected to be $21 per MBF. 


As soon as the harvesting is complete, the company will reforest the land. Reforesting costs include the following:
Per Acre Cost
Excavator piling $160
Broadcast burning 280
Site preparation 140
Planting costs 270
All costs are expected to increase at the inflation rate. 


Assume all cash flows occur at the year of harvest. For example, if the company begins harvesting the timber 20 years from today, the cash flow from the harvest will be received 20 years from today. When the company logs the land, it will immediately replant the land with new saplings. The return is 10% and the inflation rate is expected to be 3.7% per year. Bunyan Lumber has a 35% tax rate. 

Clear cutting is a controversial method of forest management. To obtain the necessary permits, Bunyan Lumber has agreed to contribute to a conservation fund every time it harvests the lumber. If the company harvested the forest today, the required contribution would be $300,000. The company has agreed that the required contribution will grow by 3.2% per year. When should the company harvest the forest?

New to NPV. Can you please send me the answer (in detail) to the question of Moses Kidane on 1st August 2007?

Many, many thanks …. keep up the good work!

Regards,
Ray

Please assist as I am new to NPV.

I saw this example and dont understand how it is calculated “what is expected to be made at the end of each year”. How does one get to these figures.

year 1 – 3000 ????
year 2 – 4300 ????
year 3 – 5800 ????

**Example**

In order for us to calculate NPV, let’s use the following example.

Suppose we’d like to make 10% profit on a 3 year project that will initially cost us $10,000.

a) In the first year, we expect to make $3000
b) In the second year, we expect to make $4300
c) In the third year, we expect to make $5800

You are a bank manager. Mister Kent is considering starting up a retail business. In order to obtain a loan from your bank, Mister Kent has prepared the following schedule of net cash flows for you.

Initial Outlay Annual Cash Flows
Year 0 – RM30 000
Year 1 – RM5 000
Year 2 + RM5 500
Year 3 + RM10 000
Year 4 + RM10 000
Year 5 + RM10 000
Year 6 onwards + RM15 000
Given a required rate of return of 14%

Compute the value of the cash flows from Year 6 onwards. State the value today of this enterprise. As a bank manager, from you position point of view, recommend to the bank and request the addition information from Mister Kent.

Can anyone help me on this??

Can anyone show me how to figure this out?

The managers of merton medical clinic are analyzing a proposed project. The project’s most likely NPV is $120,000, but as evidence by the following NPV distribution, theres is considerable risk involved.

Probability NPV
.05 (700000)
.2 (250,000)
.5 120,000
.2 200,000
.05 300,000

A. What are the projects expected NPV and standard deviation of NPV?
B.Should the base case analysis use the most likely NPV or the expected NPV? Explain your answer?

@Jones – Certainly an interesting case,

the NPV would be: $30,000

I might be wrong on the standard deviation but I get: 2790000000$

I don’t think the std dev is very meaningful when you get an average of nearly 0 and such a wide range of possibilities. I guess I would use the NPV personally as well as the willingness of the owner to sustain huge losses, that while improbable are certainly possible. It then becomes more of a qualitative argument and depends more on your attitude towards risk. What are your thoughts? Personally, I think that any project that has such a wide range with an average near 0 will make the std dev basically meaningless….

In the first year, we expect to make $3000
b) In the second year, we expect to make $4300
c) In the third year, we expect to make $5800
and how to calculate for NPV and IRR

Part A
ABC Ltd is a family run company incorporated fifty years ago. It manufactures a range of basic household cleaners but in the main for two large national do-it-yourself(D-I-Y) retailers who market the products under their own brand names.
The company has six directors all drawn from the family. Two of the directors are senior and older controlling 55% of the shares. The remaining four directors are younger, controlling 45% of the shares between them.
The younger directors feel that the company needs to become more dynamic and want to change many of the traditional ways of running the business (e.g. full time salaried staff, no reliance on debt, low dividends). In addition pressure is being put on margins by the two large customers with rumours that one is seeking to obtain supplies from the Far East. Their concern is twofold. First, that the production facilities need upgrading to prevent this happening. Second, seek new customers by marketing products under their own brand.
You have been provided with the following basic information about the company’s financial history:
ABC Ltd: Summary Financial Statements 2009-2011
Balance Sheet as at 31 December 2009 2010 2011
$’000 $’000 $’000
Fixed assets (net of depreciation) 5,110 6,052 5,634
Net current assets 1,006 231 783
——— ——— ———
Net assets 6,116 6,283 6,417
——— ——— ———
Represented by:
Share capital 1,000 1,000 1,000
Reserves 5,116 5,283 5,417
——— ——— ———
6,116 6,283 6,417
——— ——— ———
Income Statement for the year ended 31 December

$’000 $’000 $’000
Sales 8,356 9,589 10,364
Cost of goods sold 5,983 6,568 7,218
——— ——— ———
Gross Profit 2,373 3,021 3,151
Selling, general and admin expense 856 998 1,032
Depreciation 836 1,022 1,210
Interest expense/(income) (46) 103 60
Directors’ salaries 360 380 380
——— ——— ———
Pre-tax profit 367 518 469
Taxation 121 171 155
——— ——— ———
Profit after tax 246 347 314
Dividends 160 180 180
——— ——— ———
Profit retained 86 167 134
——— ——— ———

The company occupies freehold premises on the outskirts of a large town. The property was bought in the 1980s and is carried in the accounts at its original cost of $400,000. The auditors have queried this treatment as the market value of the property is believed to be in the region of $3 million. However, the older directors regard the revaluation of assets as imprudent in the current economic climate.
The company has no long-term debt. It does have an overdraft facility, which fluctuates throughout the year but averages around $1 million overdrawn.
Question 1
You have been given the following information about the younger directors’ project to invest in additional manufacturing capacity:
1. The cost of the investment in today’s (September 2011) money is $8m.
2. The new plant has an estimated useful life of five years, and an estimated scrap value of 15% of its original cost in real terms.
3. Inflation is estimated at 3% per annum.
4. The company can borrow funds at 1.5% over LIBOR, which is currently 4.25%.
5. The new plant will be paid for and commissioned in June 2012.
6. Fixed costs of operating the plant will be $1.2m per annum in today’s money.
7. Variable operating costs will be 60% of sales value.
8. The project is expected to generate new sales of $7m per annum, in today’s money, if no additional marketing is undertaken (see point 10).
9. All cash inflows attract tax at 30% and all cash outflows qualify for tax relief at the same rate. Tax is payable 12 months after the end of the financial year.
10. If the company were to launch an intensive marketing campaign to raise public awareness of its new brand, new sales could be increased by 12%. The budget for the campaign would be $250,000 p.a. in today’s money) for three years starting in June 2012.
Undertake an NPV appraisal of the project. Ensure that you include sufficient documentation to enable the Board of Directors to review the NPV model. State any assumptions that you have made, including the discount rate used which could be an assessment of the WACC for ABC Ltd.

Wooly Wanders is a New Zealand manufacturer and retailer of woolen clothes. Their machinery is getting old and they are struggling to compete with low cost imported clothes. The company is thinking of investing in new machinery which would enable them to make better quality clothes and sell at a higher price. The new machinery would also require less staff, giving a saving in labor costs. However this would mean redundancy for some long service staff. Wooly Wanderers have engaged your accounting firm to advise them on this decision.

DETAILS
The new machinery will cost $20m to buy further $4m to install. It will last for 10 years, with scrap value of $1m in 10 years. The machinery will need to be re-programmed in years 4 and 7 at a cost of $2m each time. The company should make $4m more each year through higher selling prices, with no increase in material costs. Labor saving will be $1.2m redundancy cost to be paid in year 1. The company tax rate is 30%.Assume that the redundancy payments and the machinery re-programming cost are tax deductible.
Prepare a business case for Wooly Wanderers on the capital expenditure decision. You can choose the discount rate to use but you must justify your reason. Prepare Discounted cash flow.

I need help with this problem:
A company is considering whether to purchase a new pumping
machinery at a cost of £100k but which is expected to give rise to
additional cash inflows of £50k per year for four years. Taxation is at the
rate of 35%. Taxation is paid one year after the end of the company’s
accounting year. The machinery is eligible for 25% annual writing down
allowances. It is anticipated that the machinery will be sold at the end of
year 4 at its written down value for taxation purposes. The company
decided to use a discount rate of 10% to calculate the present value of
future cash inflows. Calculate the net present value.
Thanks in advance

MyCompany Plc is a company currently engaged in manufacturing of toys. It wishes to diversify into the manufacturing of mobile phones. The investment details: The company’s equity beta is 1.07 and is currently debt to equity ratio of 30:70, however the company’s gearing will change as a result of new project. Firms involved in mobile phones have an average equity beta of 1.12 and an average debt to equity ratio of 40:60 Assume that the debt is risk free, that the risk free rate is 8% and that the expected return from the market portfolio is 20%. The new project will involve the purchase of new machinery for a cost of £1200,000 (net of issue costs), which will produce annual cash inflows of £650,000 for 3 years. At the end of this time it will have no scrap value. Corporation tax is payable in the same year at a rate of 33%. The machine will attract writing down allowances of 25% p.a. on a reducing balance basis, with a balancing allowance at the end of the project life when the machine is scrapped. The financing details: The new investment will be financed as follows: Debentures (redeemable in 3 years time) :45% Rights issue of equity :55% The issue costs are 4% on the gross equity issued and 2% on the gross debt issued.Estimate the Adjusted Present Value for MyCompany Plc based on information given above.

I need help for above question, plz any 1 can???

I’m a student and I should decide this problem. Please, help me, if you can!!
A German firm can invest 20 Mio. Euro in a new machine to generate an additional
annual taxable cash flow of 10 Mio. Euro over the next four years. The machine
has to be depreciated linearly over four years. The firm can borrow and invest at
5% p.a. in GBP and for 10% p.a. in Euro. If the firm borrows money at one of
these rates the principal amount has to be paid back in year 4. The corporate tax
rate is 30%. Today the exchange rate is 1 ¿/GBP.
a) Calculate the after tax cash flows in ¿ of the investment project excluding the
loan. (5 Points)
b) What is the net present value of the project if funded by a ¿-loan? (3 Points)
Now consider funding by a GBP-loan. Assume that the term structure of interest
rates is flat in both countries and that covered interest parity holds.
c) Derive the forward foreign exchange rates for t=1,2,3,4. Ignore taxes for this
calculation.
5d) Would you obtain other forward exchange rates if all interest expenses and
revenues and all profits/losses from currency exchanges are taxed at the same
rate?
Derive your answer for an investor who borrows 1¿ for one year, invests it
in GBP and changes the money back at the forward rate after one year. De-
rive terminal wealth before taxes first and then terminal wealth after taxes.
e) Calculate the cash flows of the project in Euro when it is financed with a GBP
loan. Assume that all gains and losses are tax relevant and that the GBP-cash
flows are fully hedged in the forward market.
f) Calculate the net present value for the project with a GBP loan. Compare the
result to the result you obtained in b).

(Inflation question) A project’s initial investment is $40,000, and it has a five-year life. At the end of the fifth year, the equipment is expected to be sold for $12,000, at which time its net book value will be $5,000. The CFATs (including inflation, depreciation, and net salvage value) for the next five years are expected to be $20,000, $25,000, $10,000, $10,000, and $10,000. In real terms, the project’s cost of capital is 10%, and the riskless return is 7%. The tax rate is 46%, and the inflation rate is 3%. What is the project’s NPV?

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