P10-22 P10–22 Payback, NPV, and IRR Rieger International is evaluating the feasibility of...

Question

P10-22
    P10–22 Payback, NPV, and IRR  Rieger International is evaluating the feasibility of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows associated with the proposal, as shown in the following table. The firm has a 12% cost of capital.                Particulars    Year    Cash Flow    PVF @ 12%    PV    PVF @ 15 %    PV    PVF @ 16%    PV    Cumlative Cash Flow
    Year (t)    Cash inflows (CFt)            Initial investment    0    95000    1    $ 95,000.00    1    $ 95,000.00    1    $ 95,000.00
    1    $20,000            Present value of cash inflows                $ 95,000.00        $ 95,000.00        $ 95,000.00    $ 95,000.00
    2    $25,000
    3    $30,000            Cash Inflows
    4    $35,000            Cash Inflows    1    $20,000     XXXXXXXXXX    $ 17,857.14     XXXXXXXXXX    $ 17,391.30     XXXXXXXXXX    $ 17,241.38    $ -75,000.00
    5    $40,000            Cash Inflows    2    $ 25,000.00     XXXXXXXXXX    $ 19,929.85     XXXXXXXXXX    $ 18,903.59     XXXXXXXXXX    $ 18,579.07    $ -50,000.00
    a. Calculate the payback period for the proposed investment.                Cash Inflows    3    $ 30,000.00     XXXXXXXXXX    $ 21,353.41     XXXXXXXXXX    $ 19,725.49     XXXXXXXXXX    $ 19,219.73    $ -20,000.00
    b. Calculate the net present value (NPV) for the proposed investment.                Cash Inflows    4    $ 35,000.00     XXXXXXXXXX    $ 22,243.13     XXXXXXXXXX    $ 20,011.36     XXXXXXXXXX    $ 19,330.19    $ 15,000.00
    c. Calculate the internal rate of return (IRR), rounded to the nearest whole percent, for the proposed investment.                Cash Inflows    5    $ 40,000.00     XXXXXXXXXX    $ 22,697.07     XXXXXXXXXX    $ 19,887.07     XXXXXXXXXX    $ 19,044.52    $ 55,000.00
    d. Evaluate the acceptability of the proposed investment using NPV and IRR. What recommendation would you make relative to implementation of the project? Why?                Present value of cash inflows        150000     XXXXXXXXXX    $ 104,080.60        $ 95,918.82        $ 93,414.89
                    Net Present value    Inflow - Outflow            $ 9,080.60        $ XXXXXXXXXX        $ -1,585.11

                    Particulars
                    A)    PAYBACK PERIOD     XXXXXXXXXX    Number of years of full recovery + ( Uncovered cost at the start of year / Cash Flow during the recovery year)

                    B)    NPV    $ 9,080.60    Discounting @12 %

                    C)    IRR    15.37%    Where NPV = 0     Lower Rate of return +NPV of lower rate *( Difference in the rate of Discount / Present Value )
                    D)    Evaluation     Acceptable         As NPV Is positive and the IRR is more than the Cost of capital it is win win project
P10-25
     P10–25 All techniques with NPV profile: Mutually exclusive projects  Projects A and B, of equal risk, are alternatives for expanding Rosa Company’s capacity. The firm’s cost of capital is 13%. The cash flows for each project are shown in the following table.    Formula    Project A    Project B
    a. Calculate each project’s payback period.    Number of years of full recovery + ( Uncovered cost at the start of year / Cash Flow during the recovery year)     XXXXXXXXXX     XXXXXXXXXX
    b. Calculate the net present value (NPV) for each project.    PV Inflow - PV Outflow @ 13%    $ 6,056.72    $ 2,758.47
    c. Calculate the internal rate of return (IRR) for each project.    Lower Rate of return +NPV of lower rate *( Difference in the rate of Discount / Present Value )    14.62%    15.76%
    d. Draw the net present value profiles for both projects on the same set of axes, and discuss any conflict in ranking that may exist between NPV and IRR.
    e. Summarize the preferences dictated by each measure, and indicate which project you would recommend. Explain why.        Accept     Reject
            It is providing better results in all the secnario
                    Project A
        Project A    Project B        Particulars    Year    Cash Flow    PVF @ 13%    PV    PVF @ 15 %    PV    PVF @ 14%    PV    Cumlative Cash Flow
    Initial investment (CF0)    80000    50000        Initial investment    0    80000    1    $ 80,000.00    1    $ 80,000.00    1    $ 80,000.00
    Year (t)    Cash inflows (CFt)            Present value of cash inflows                $ 80,000.00        $ 80,000.00        $ 80,000.00    $ 80,000.00
    1    $15,000    $15,000
    2    20000    $15,000        Cash Inflows
    3    25000    $15,000        Cash Inflows    1    $15,000     XXXXXXXXXX    $ 13,392.86     XXXXXXXXXX    $ 13,043.48     XXXXXXXXXX    $ 13,157.89    $ -65,000.00
    4    30000    $15,000        Cash Inflows    2    $20,000     XXXXXXXXXX    $ 15,943.88     XXXXXXXXXX    $ 15,122.87     XXXXXXXXXX    $ 15,389.35    $ -45,000.00
    5    35000    $15,000        Cash Inflows    3    $25,000     XXXXXXXXXX    $ 17,794.51     XXXXXXXXXX    $ 16,437.91     XXXXXXXXXX    $ 16,874.29    $ -20,000.00
                     Cash Inflows    4    $30,000     XXXXXXXXXX    $ 19,065.54     XXXXXXXXXX    $ 17,152.60     XXXXXXXXXX    $ 17,762.41    $ 10,000.00
                    Cash Inflows    5    $35,000     XXXXXXXXXX    $ 19,859.94     XXXXXXXXXX    $ 17,401.19     XXXXXXXXXX    $ 18,177.90    $ 45,000.00
        Project A    Project B        Present value of cash inflows        125000     XXXXXXXXXX    $ 86,056.72        $ 79,158.04        $ 81,361.84
    Initial investment (CF0)    80000    50000        Net Present value    Inflow - Outflow            $ 6,056.72        $ XXXXXXXXXX        $ 1,361.84
    NPV    $6,057    $2,758
    IRR    14.618%    15.758%        Project B
                    Particulars    Year    Cash Flow    PVF @ 13%    PV    PVF @ 15 %    PV    PVF @ 16%    PV    Cumlative Cash Flow
                    Initial investment    0    50000    1    $ 50,000.00    1    $ 50,000.00    1    $ 50,000.00
                    Present value of cash inflows                $ 50,000.00        $ 50,000.00        $ 50,000.00    $ 50,000.00
                    Cash Inflows
                    Cash Inflows    1    $15,000     XXXXXXXXXX    $ 13,274.34     XXXXXXXXXX    $ 13,043.48     XXXXXXXXXX    $ 12,931.03    $ -35,000.00
                    Cash Inflows    2    $15,000     XXXXXXXXXX    $ 11,747.20     XXXXXXXXXX    $ 11,342.16     XXXXXXXXXX    $ 11,147.44    $ -20,000.00
                    Cash Inflows    3    $15,000     XXXXXXXXXX    $ 10,395.75     XXXXXXXXXX    $ 9,862.74     XXXXXXXXXX    $ 9,609.87    $ -5,000.00
                    Cash Inflows    4    $15,000     XXXXXXXXXX    $ 9,199.78     XXXXXXXXXX    $ 8,576.30     XXXXXXXXXX    $ 8,284.37    $ 10,000.00
                    Cash Inflows    5    $15,000     XXXXXXXXXX    $ 8,141.40     XXXXXXXXXX    $ 7,457.65     XXXXXXXXXX    $ 7,141.70    $ 25,000.00
                    Present value of cash inflows        75000     XXXXXXXXXX    $ 52,758.47        $ 50,282.33        $ 49,114.40
                    Net Present value    Inflow - Outflow            $ 2,758.47        $ XXXXXXXXXX        $ XXXXXXXXXX
Chart Analysis
Project A    Initial investment (CF0)    NPV    IRR    80000     XXXXXXXXXX     XXXXXXXXXX    Project B    Initial investment (CF0)    NPV    IRR    50000     XXXXXXXXXX     XXXXXXXXXX
P11-11
    P11–11 Calculating initial investment Vastine Medical Inc. is replacing its computer system, which was purchased 2 years ago at a cost of $325,000. The system can be sold today for $200,000. It is being depreciated using MACRS and a 5-year recovery period. A new computer system will cost $500,000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 21% tax rate.
    a. Calculate the book value of the existing computer system (see Table 4.2).    Book Value -Deperciation 1st year - deperciation 2nd year = WDV    $ 325,000.00    $ 65,000.00    $ 104,000.00    $ 156,000.00
    b. Calculate the after-tax proceeds of its sale for $200,000.    Sales Price - Tax of Recaputre of depeciation     $ 200,000.00    $ 156,000.00    $ 44,000.00    $ 17,600.00    $ 182,400.00
    c. Calculate the initial investment associated with the replacement project. What would the initial investment be if the new computer qualified for 100% bonus depreciation?    Initial Investment=Cost of new Computer-Book Value of old computer+Tax on recapture of depreciation    500000    $ 200,000.00    $ 17,600.00        $ 317,600.00
    a) Vastline Medical Inc.
Cost of computer purchased two years ago= $ XXXXXXXXXX3,25,000.00
Tax Rate 40%
Depreciation as per MACRS 5 year recovery period
time period Rate of Depreciation
1 20%
2 32%
3 19.20%
4 11.52%
5 11.52%
6 5.76%
Depreciation Recapture: gain on sale of Depreciable assets is known as depreciation recapture and it is treated as income.
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P11-16
                    Cost Vlue    Net Value
    P11–16 Operating cash inflows A partnership is considering renewing its equipment to meet increased demand for its product. The cost of equipment modifications is $1.9 million plus $100,000 in installation costs. The firm will depreciate the equipment modifications under MACRS, using a 5-year recovery period. (See Table 4.2 for the applicable depreciation percentages.) Additional sales revenue from the renewal should amount to $1,200,000 per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 40% of the additional sales. The firm is subject to a tax rate of 40%. (Note: Answer the following questions for each of the next 6 years.)    Deperciation Anlaysis         Depercition Rte     XXXXXXXXXX
    a. What incremental earnings before interest, taxes, depreciation, and amortization will result from the renewal?    Year    1    20%    4000000     XXXXXXXXXX
    b. What incremental net operating profits after taxes will result from the renewal?        2    32%    6400000    9600000
    c. What operating cash flows will result from the renewal?        3    19%    3800000    5800000
            4    12%    2400000    3400000
            5    12%    2400000    1000000
            6    5%    1000000    0
    Calculation of NPV    Year     1    2    3    4    5    6
        Cost
        Additional Operating Reveune    $ 12,000,000.00    $ 12,000,000.00    $ 12,000,000.00    $ 12,000,000.00    $ 12,000,000.00    $ 12,000,000.00
        Additional Operating Expense    $ 4,800,000.00    $ 4,800,000.00    $ 4,800,000.00    $ 4,800,000.00    $ 4,800,000.00    $ 4,800,000.00

    A)    Incremental EBITDA    $ 7,200,000.00    $ 7,200,000.00    $ 7,200,000.00    $ 7,200,000.00    $ 7,200,000.00    $ 7,200,000.00
        Deperciation     $ 4,000,000.00    $ 6,400,000.00    $ 3,800,000.00    $ 2,400,000.00    $ 2,400,000.00    $ 1,000,000.00
        EBT     $ 3,200,000.00    $ 800,000.00    $ 3,400,000.00    $ 4,800,000.00    $ 4,800,000.00    $ 6,200,000.00
        TAX    $ 1,280,000.00    $ 320,000.00    $ 1,360,000.00    $ 1,920,000.00    $ 1,920,000.00    $ 2,480,000.00
    B)    Incremental Profit After Tax    $ 1,920,000.00    $ 480,000.00    $ 2,040,000.00    $ 2,880,000.00    $ 2,880,000.00    $ 3,720,000.00
        Deperciation     $ 4,000,000.00    $ 6,400,000.00    $ 3,800,000.00    $ 2,400,000.00    $ 2,400,000.00    $ 1,000,000.00
    C)    Incremental Operating Cash Flow    $ 5,920,000.00    $ 6,880,000.00    $ 5,840,000.00    $ 5,280,000.00    $

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Akshay Kumar · Accepted Answer

P15-1
	P15–1 Cash conversion cycle American Products is concerned about managing cash efficiently. On average, inventories have an age of 80 days, and accounts receivable are collected in 40 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30 million. Goods sold total $20 million, and purchases are $15 million.
	a. Calculate the firm’s operating cycle.			a	              PARTICULARS			                      AMOUNT
					Average inventories					90
					Add: Average Account recievable					60
					Firm 's operating cycle( days)					150
	b. Calculate the firm’s cash conversion cycle.			b	              PARTICULARS			                      AMOUNT
					Average inventories					90
					Add:  Average Account recievable					60
					Firm 's operating cycle					150
					Less:Average Accounts payable					30
					Firm's cash conversion cycle					120
	c. Calculate the amount of resources needed to support the firm’s cash conversion cycle.			c	              PARTICULARS			                      AMOUNT
					Inventory 				7,307,260.27
					7307260.27= (30,000,000 x 90/365)
					Add: Accounts Recievable				4,931,506.85
					4,931,506.85= (30,000,000 x 60/365)
					Less: Accounts payable				2,465,753.42
					2,465,753.42=(30,000,000 x 30/365)
					Resources needed to support the firm CCC's				9,773,013.70
	d. Discuss how management might be able to reduce the cash conversion cycle.			d	The cash conversion can be reduced by increasing the payable time and decreasing the recievable time or by the combination of both
P15-4
	P15–4 Aggressive versus conservative seasonal funding strategy Dynabase Tool has forecast its total funds requirements for the coming year as shown in the following table.
	Month	Amount	Month	Amount
	January	$2,000,000	July	$12,000,000
	February	  2,000,000	August	   14,000,000
	March	  2,000,000	September	      9,000,000
	April	  4,000,000	October	      5,000,000
	May	  6,000,000	November	      4,000,000
	June	  9,000,000	December	      3,000,000
	a. Divide the firm’s monthly funds requirement into (1) a permanent component and (2) a seasonal component, and find the monthly average for each of these components.
		a	Average permanent requirement = $24,000,000 / 12 = $2,000,000				$2,000,000.00	put formula in the answer
			Average seasonal requirement = $48,000,000 / 12 = $4,000,000				$4,000,000.00	put in formula in the answer 
	b. Describe the amount of long-term and short-term financing used to meet the total funds requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy. Assume that, under the aggressive strategy, long-term funds finance permanent needs and short-term funds are used to finance seasonal needs.
			b	Aggressive funding strategy :
				It will finance seasonal needs with short-term funding, so amount will be $4,000,000 as calculated in part a. And the permanent needs will be financed with long term funds and the amount will be $2,000,000
				Conservative funding strategy :
				It will finance the highest requirement level i.e. $14,000,000 with long-term debt.
	c. Assuming that short-term funds cost 5% annually and that the cost of long-term funds is 10% annually, use the averages found in part a to calculate the total cost of each of the strategies described in part b. Assume that the firm can earn 3% on any excess cash balances.
			c	Aggressive = 2,000,000 * 10% + 4,000,000 * 5%
				Aggressive Strategy	$400,000.00
				Aggressive Strategy = $400,000	put  formula in answer
				Conservative Strategy = Peak Level * 10% = $14,000,000 * 10%
				Conservative Strategy	$1,400,000.00
				Conservative Strategy= $1,400,000	put formula in the answer
	d. Discuss the profitability–risk tradeoffs associated with the aggressive strategy and those associated with the conservative strategy.
			d	In the given case, there is a huge difference in cost associated with aggressive strategy and conservative strategy. The conservative strategy is almost three times more expensive as compared to aggressive strategy, which makes aggressive strategy more attractive. Thus,

P10-22 P10–22 Payback, NPV, and IRR Rieger International is evaluating the feasibility of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows...

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