QUESTION 1 You have a $1 million capital budget and must make the ...

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QUESTION 1 You have a $1 million capital budget and must make the decision about which investments your firm should undertake for the coming year. There are three projects available and the cash flows of each project appear below. Assume a cost of capital of 12% Which project do you select using the the profitability index, and what is its PI? (Show your work. Two decimal places required. Highlight or bold your answer.) Project 1 Project 2 Project 3 Cash flow Year 0 -$400,000 -$500,000 -$1,000,000 Year 1 175,000 300,000 500,000 Year 2 275,000 350,000 700,000 Year 3 275,000 350,000 700,000 QUESTION 2 Swerling Company is considering a project with the following cash flows What is the payback period of the proposed Swerling Company project? (Show your work. Label years. Two decimal places required. Highlight or bold your answer.) What is the net present value of the proposed Swerling Company project if the discount rate is 6%? (Show your work. Label $. Two decimal places required. Highlight or bold your answer.) What is the profitability index of the proposed Swerling Company project if the discount rate is 6%? (Show your work. Two decimal places required. Highlight or bold your answer.) What is the IRR of the proposed Swerling Company project? (Show your work. Label %. Two decimal places required. Highlight or bold your answer.) What is the discounted payback period of the proposed Swerling Company project if the discount rate is 6%? (Show your work. Label years. Two decimal places required. Highlight or bold your answer.) Year Cash Flow ($20,000) 1 $ 3,000 2 $ 4,000 3 $ 5,000 4 $ 6,000 5 $ 7,000 QUESTION 3 Thompson Manufacturing is considering two investment proposals. The first involves a quality improvement project, and the second is about an advertising campaign. The cash flows associated with each project appear below: Quality Improvement Advertising Campaign Initial cash outflow $100,000 $100,000 Cash Inflows Year 1 10,000 80,000 Year 2 30,000 45,000 Year 3 125,000 10,000 Suppose the hurdle rate of the firm is 10% Calculate the cash flows of the "incremental project" by subtracting the cash flows of the second project from the cash flows of the first project. What is the IRR of the incremental project? (Show your work. Label %. One decimal place required. Highlight or bold your answer.) QUESTION 4 A firm that manufactures DVD players for automakers currently has excess capacity. The firm expects that it will exhaust its excess capacity in three years. At that time it will have to invest $2 million to build new capacity. Suppose that the firm can accept additional work as a subcontractor for another company By doing so, the firm will receive a net cash inflow of $120,000 immediately and in each of the next two years. However, the firm will have to begin expansion two years earlier than originally planned to bring new capacity on line. Assume a discount rate of 10% What is the NPV if the firm accepts the subcontractor job? (Show your work. Label $. No decimal places required. Highlight or bold your answer.) QUESTION 7 Future Semiconductors is evaluating a new etching tool. The equipment costs $1,000,000 and will generate after-tax cash inflows of $400,000 per year for six years Assume the firm has a 15% cost of capital What's the NPV of the investment? (Show your work. Label $. No decimal places required. Highlight or bold your answer.) QUESTION 11 A machine costs $3 million and has zero salvage value. Assume a discount rate of 10% and a 40% tax rate. The machine is depreciated straight-line over 3 years for tax purpose What is the present value of depreciation tax savings associated with this machine? (Show your work. Label $. No decimal places required. Highlight or bold your answer.) QUESTION 12 Johnson Chemicals is considering an investment project The project requires an initial $3 million outlay for equipment and machinery resulting in finance charges in years 1-4 of $20,000. $15,000. $10,000, and $5,000, respectively. Sales are projected to be $1.5 million per year for the next four years. The equipment will be fully depreciated straight-line by the end of year 4. Cost of goods sold and operating expense (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for $400,000 at the end of year 4. Johnson Chemicals also needs to add net working capital of $100,000 immediately. The net working capital will be recovered in full at the end of the fourth year. Assume the tax rate is 40% and the cost of capital is 10% What is the operating cash flow for years 1-4? (Show your work. Label $. No decimal places required. Highlight or bold your answer.)

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