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    Module 3 - Capital Budgeting

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    Princess Frean Villegas
    This document presents three capital budgeting problems. Problem 1 involves analyzing a $2.4 million project with $200,000 annual net operating income over 8 years. Problem 2 requires calculating NPV, IRR, payback and discounted payback for two $10,000 projects with differing cash flows. Problem 3 examines mutually exclusive and independent machine investments of $500,000 that generate cash flows over 2 or 4 years.

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    Module 3 - Capital Budgeting

    Uploaded by

    Princess Frean Villegas
    208 views1 page
    This document presents three capital budgeting problems. Problem 1 involves analyzing a $2.4 million project with $200,000 annual net operating income over 8 years. Problem 2 requires calculating NPV, IRR, payback and discounted payback for two $10,000 projects with differing cash flows. Problem 3 examines mutually exclusive and independent machine investments of $500,000 that generate cash flows over 2 or 4 years.

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    This document presents three capital budgeting problems. Problem 1 involves analyzing a $2.4 million project with $200,000 annual net operating income over 8 years. Problem 2 requires calculating NPV, IRR, payback and discounted payback for two $10,000 projects with differing cash flows. Problem 3 examines mutually exclusive and independent machine investments of $500,000 that generate cash flows over 2 or 4 years.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    208 views1 page

    Module 3 - Capital Budgeting

    Uploaded by

    Princess Frean Villegas
    This document presents three capital budgeting problems. Problem 1 involves analyzing a $2.4 million project with $200,000 annual net operating income over 8 years. Problem 2 requires calculating NPV, IRR, payback and discounted payback for two $10,000 projects with differing cash flows. Problem 3 examines mutually exclusive and independent machine investments of $500,000 that generate cash flows over 2 or 4 years.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    PROBLEM 1

    Lamar Company is considering a project that would have an eight-year life and require a $2,400,000 investment in
    equipment. At the end of eight years, the project would terminate and the equipment would have no salvage value. The
    project would provide net operating income each year as follows:

    Sales $3,000,000
    Variable expenses 1,800,000
    Contribution margin 1,200,000
    Fixed expenses:
    Advertising, salaries, and other fixed out-of-pocket costs $700,000
    Depreciation 300,000
    Total fixed expenses 1,000,000
    Net operating income $200,000

    The company’s discount rate is 12%.

    Required:
    1. Compute the annual net cash inflow from the project.
    2. Compute the project’s net present value. Is the project acceptable?
    3. Compute the project’s payback period.
    4. Compute the project’s simple rate of return. (Formula: Annual incremental net operating income / Initial investment)

    PROBLEM 2
    You must analyze two projects, X and Y. Each project costs $10,000 and the firm’s WACC is 12%. The expected cash flows
    are as follows:
    0 1 2 3 4

    Project X - $10,000 $6,500 $3,000 $3,000 $1,000


    Project Y - $10,000 $3,500 $3,500 $3,500 $3,500
    Required:
    1. Calculate the each project’s NPV, IRR, payback and discounted payback.
    2. Which project(s) should be accepted if they are independent?
    3. Which project(s) should be accepted if they are mutually exclusive?

    PROBLEM 3
    Wisconsin Dairy Inc. is deciding on its capital budget of the upcoming year. Among the projects being considered are two
    machines, W and WW. W costs $500,000 and will produce expected after-tax cash flows of $300,000 during the next 2
    years. WW also costs $500,000, but it will produce after-tax cash flows of $165,000 during the next 4 years. Both projects
    have a 10% WACC.

    Required: Use NPV to answer the questions.


    1. If the projects are independent and not repeatable, which project or projects should the company accept?
    2. If the projects are mutually exclusive but are not repeatable, which project should the company accept?

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