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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P10-22 P10–22 Payback, NPV, and IRR  Rieger International is evaluating the feasibility of investing $95,000 in a piece of equipment that has a 5-year life. The firm has estimated the cash inflows associated with the proposal, as shown in the following table. The firm has a 12% cost of capital.ParticularsYearCash FlowPVF @ 12%PVPVF @ 15 %PVPVF @ 16%PVCumlative Cash Flow Year (t)Cash inflows (CFt)Initial investment0950001$ 95,000.001$ 95,000.001$ 95,000.00 1$20,000Present value of cash inflows$ 95,000.00$ 95,000.00$ 95,000.00$ 95,000.00 2$25,000 3$30,000Cash Inflows 4$35,000Cash Inflows1$20,0000.8928571429$ 17,857.140.8695652174$ 17,391.300.8620689655$ 17,241.38$ -75,000.00 5$40,000Cash Inflows2$ 25,000.000.7971938776$ 19,929.850.7561436673$ 18,903.590.7431629013$ 18,579.07$ -50,000.00 a. Calculate the payback period for the proposed investment.Cash Inflows3$ 30,000.000.7117802478$ 21,353.410.6575162324$ 19,725.490.6406576735$ 19,219.73$ -20,000.00 b. Calculate the net present value (NPV) for the proposed investment.Cash Inflows4$ 35,000.000.6355180784$ 22,243.130.5717532456$ 20,011.360.5522910979$ 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 Inflows5$ 40,000.000.5674268557$ 22,697.070.4971767353$ 19,887.070.4761130154$ 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 inflows1500003.6047762023$ 104,080.60$ 95,918.82$ 93,414.89 Net Present valueInflow - Outflow$ 9,080.60$ 918.82$ -1,585.11 Particulars A)PAYBACK PERIOD3.5714285714Number of years of full recovery + ( Uncovered cost at the start of year / Cash Flow during the recovery year) B)NPV$ 9,080.60Discounting @12 % C)IRR15.37%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.FormulaProject AProject 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)3.66666666674.3333333333 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 AProject BParticularsYearCash FlowPVF @ 13%PVPVF @ 15 %PVPVF @ 14%PVCumlative Cash Flow Initial investment (CF0)8000050000Initial investment0800001$ 80,000.001$ 80,000.001$ 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 220000$15,000Cash Inflows 325000$15,000Cash Inflows1$15,0000.8928571429$ 13,392.860.8695652174$ 13,043.480.8771929825$ 13,157.89$ -65,000.00 430000$15,000Cash Inflows2$20,0000.7971938776$ 15,943.880.7561436673$ 15,122.870.7694675285$ 15,389.35$ -45,000.00 535000$15,000Cash Inflows3$25,0000.7117802478$ 17,794.510.6575162324$ 16,437.910.6749715162$ 16,874.29$ -20,000.00 Cash Inflows4$30,0000.6355180784$ 19,065.540.5717532456$ 17,152.600.5920802774$ 17,762.41$ 10,000.00 Cash Inflows5$35,0000.5674268557$ 19,859.940.4971767353$ 17,401.190.5193686644$ 18,177.90$ 45,000.00 Project AProject BPresent value of cash inflows1250003.6047762023$ 86,056.72$ 79,158.04$ 81,361.84 Initial investment (CF0)8000050000Net Present valueInflow - Outflow$ 6,056.72$ -841.96$ 1,361.84 NPV$6,057$2,758 IRR14.618%15.758%Project B ParticularsYearCash FlowPVF @ 13%PVPVF @ 15 %PVPVF @ 16%PVCumlative Cash Flow Initial investment0500001$ 50,000.001$ 50,000.001$ 50,000.00 Present value of cash inflows$ 50,000.00$ 50,000.00$ 50,000.00$ 50,000.00 Cash Inflows Cash Inflows1$15,0000.8849557522$ 13,274.340.8695652174$ 13,043.480.8620689655$ 12,931.03$ -35,000.00 Cash Inflows2$15,0000.7831466834$ 11,747.200.7561436673$ 11,342.160.7431629013$ 11,147.44$ -20,000.00 Cash Inflows3$15,0000.6930501623$ 10,395.750.6575162324$ 9,862.740.6406576735$ 9,609.87$ -5,000.00 Cash Inflows4$15,0000.6133187277$ 9,199.780.5717532456$ 8,576.300.5522910979$ 8,284.37$ 10,000.00 Cash Inflows5$15,0000.542759936$ 8,141.400.4971767353$ 7,457.650.4761130154$ 7,141.70$ 25,000.00 Present value of cash inflows750003.5172312615$ 52,758.47$ 50,282.33$ 49,114.40 Net Present valueInflow - Outflow$ 2,758.47$ 282.33$ -885.60 Chart Analysis Project AInitial investment (CF0)NPVIRR800006056.72319150871770.14617951787799011Project BInitial investment (CF0)NPVIRR500002758.46892314059370.15758265919221556 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 depreciation500000$ 200,000.00$ 17,600.00$ 317,600.00 a) Vastline Medical Inc. Cost of computer purchased two years ago= $ 3,25,000.00 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. https://jigsaw.vitalsource.com/books/9780134478197/epub/OPS/xhtml/fileP70010143300000000000000000017F9.xhtml P11-16 Cost VlueNet 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 $1,200,000 per year, and additional operating expenses and other costs (excluding depreciation and interest) will amount to 40% of the additional sales. The firm is subject to a tax rate of 40%. (Note: Answer the following questions for each of the next 6 years.)Deperciation Anlaysis Depercition Rte20000000 a. What incremental earnings before interest, taxes, depreciation, and amortization will result from the renewal?Year120%400000016000000 b. What incremental net operating profits after taxes will result from the renewal?232%64000009600000 c. What operating cash flows will result from the renewal?319%38000005800000 412%24000003400000 512%24000001000000 65%10000000 Calculation of NPVYear 123456 Cost Additional Operating Reveune$ 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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Answered Same DayApr 26, 2021

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

Akshay Kumar answered on Apr 27 2021
144 Votes
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, aggressive strategy is more profitable and also...
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