BUS 520 Managerial Finance XXXXXXXXXXpoints, 2 for part a, 3 for the others) AZM Corporation is deciding between the introduction of two new automobiles: a traditional gasoline-powered model, or a...

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Answer To: BUS 520 Managerial Finance XXXXXXXXXXpoints, 2 for part a, 3 for the others) AZM Corporation is...

Neenisha answered on Apr 22 2021
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BUS 520 Managerial Finance
1. (14 points, 2 for part a, 3 for the others)
AZM Corporation is deciding between the introduction of two new automobiles: a traditional gasoline-powered model, or a hydrogen fuel-cell model. Incremental cash flows in millions of dollars, to be received at the end of each period, are
estimated to be:

    Year
    0
    1
    2
    3
    4
    5
    Gas-Powered
    -540
    320
    240
    160
    40
    0
    Fuel Cell
    -650
    40
    80
    160
    300
    600
(a) Compute each project’s payback period.
Ans.
Payback Period =
    Projects
    Initial Investment
    Average Cash Flows
    Payback Period
    Gas-Powered
    -540
    152
    3.55
    Fuel Cell
    -650
    236
    2.75
(b) What is each project’s internal rate of return?
Ans.
IRR is the rate at which NPV = 0
For this we first calculated the NPV of two project and using excel ‘Goal Seek’, we set the value of NPV as 0 to allow IRR to change.
NPV = + …….+ + Initial Investment
    Project
    IRR
    NPV
    Gas-Powered
    20.66%
    0
    Fuel Cell
    15.90%
    0
(c) Compute each project’s net present value, assuming that the appropriate discount rate is 10% per year.
Ans.
Discount rate = r = 10%
NPV = + …….+ + Initial Investment
    Year
    NPV
    Gas-Powered
    96.79
    Fuel Cell
    150.15
(d) Assuming AZM’s goal is to maximize firm value, which project should be taken? Support your answer, including a short statement of which evaluation criterion was most relevant, which were less relevant, and why.
Ans.
To maximize the firm value, project which need to be taken is the project with maximum NPV
Since the NPV of Fuel Cell project is more than that of Gas-Powered Project, therefore, we will select Fuel Cell Project. This implies that the cash flow in this project are more than in Gas-Powered project.
(e) Compute each projects NPV again, assuming a discount rate of 14% per year. Does this change your recommendation? Explain the intuition.
Ans.
Discount rate = r = 14%
NPV = + …….+ + Initial Investment
    Year
    NPV
    Gas-Powered
    57.05
    Fuel Cell
    43.89
If the discount rate is 14% then the NPV of Gas-powered project is more than that of Fuel Cell Project. Hence, we will select Gas-Powered project as the cash flows are more.
2. (12 points)
Carlson Corp. is considering whether to expand widget production. This would require the purchase of a new widget-producing machine at a cost of $5,400,000. The machine would produce 450,000 widgets per year during its useful life of three years, and would be depreciated for tax purposes at a rate of $1,800,000 per year. The machine would have a salvage value of $500,000. Expanding widget production would also require the use of a building that could otherwise be leased for $500,000 per year. Working capital would be 12% of the next year’s sales. Widget prices are $20 and are expected to remain stable. The materials and labor required to produce a widget cost $12, and these costs are also expected to remain stable. The income tax rate is 21%. The discount rate is 10% per year.
(a) (9 pts) Compute the incremental free cash flow resulting from the purchase of a widget machine on a year-by-year basis.
Ans.
    Working Capital...
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