Finance Problems In Tutorial Library

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1.  You are considering opening a new plant.  The plant will cost $100 million upfront and will take one yr. to build.  After that, it is expected to produce profits of $30 million at the end of every yr of production.  The cash flows are expected to last forever.  Calculate the NPV of this investment opportunity if your cost of capital is 8%.  Should you make the investment?  Calculate the IRR and use it to detemine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

9.  Innovation Company is thinking about marketing a new software product.  Upfront costs to market and develop the product are $5 million.  The product is expected to generate profits of $1 million per yr. for ten yrs.  The company will have to provide product support expected to cost $100,000 per yr. in perpetuity.  Assume all profits and expenses occur at the end of the year.    

a) What is the NPV of this investment if the cost of capital is 6%.  Should the firm undertake the project?  Repeat the analysis for discount rates of 2% and 11%

b)  How many IRRs does this investment opportunity have?

c)  What does the IRR rule indicate about this investment?

18.  You work for an outdoor play structure manufacturing company and are trying to decide between two projects

Year End Cash Flow ($ thousands)

Project                                     0                                 1                              2                            IRR

Playhouse                     -30                       15                     20                    10.4%

Fort                             -80                        39                     52                    8.6%

You can undertake on ly one project.  If your cost of capital is 8%, use the incremental IRR rule to make the correct decision. 

3.  Home Builder Supply, a retailer in the home improvment industry currently operates 7 retail outlets in Georgia and South Carolina.  Managment is contemplating building an 8th retail store across town from its most successful retail outlet.  The company already owns the land for this store, which currently has an abandoned warehouse located on it.  Last month the marketing department spend $10,000 on market research to determine the extent of customer demand for the new store.  Now Home Builder Supply must decided wheter to build and open the new store. 

Which of the following should be included as part of the incremental earning for the proposed new retail store?

a)  The cost of the land where the store will be located. 

b)  The cost of demolishing the abandoned warehouse and clearing the lot. 

c)  The loss of sales in the existing retail outlet, if customers who previously drove across town to shop at the extisting outlet become customers of the new store instead.

d)  The $10,000 in market research spent to evaluate customer demand. 

e)  Construction cost for the new store. 

f)  The value of the land if sold

g)  Interest expense on the debt borrowed to pay the construction cost. 

6.  Elmdale Enterprises is deciding whether to expand its production facilities.  Although longterm cash flows are difficult to estimate, managment has projected the following cash flows for the first two years (in million of dollars)

                                                           Year 1                                  Year 2

 Revenues                                               125                                     160

Cost of goods sold/operating expense       

Depreciation                                             40                                       60

Increase in working capital                         25                                       36

Capital expeditures                                   30                                       40

Marginal corporate tax rate                        35%                                    35%

a)  What are the incremental earnings for this project for years 1 and 2?

b)  What are the free cash flows for this project for the first two years?

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1. Finance
2. Financial Management
3. Accounting
4. Corporate Finance
5. Investment and Portfolio Management


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