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1) Vornado Realty Trust (VNO), a New York based REIT. is evaluating six real estate Management plans to buy the properties today and sell them five years from today The following table summarizes the initial cos and the expected sale price for each property, as well as the appropriate discount rate based on the risk feach venture. VNO has total capital budget of $18,000,000 invest in properties. Project Cost Discount Expected Sale IRR NPV Profitability Rate Price in Year 5 Index Sussex $3M 15% $18M ? ? ? Ridge Orchard $15M 15% $75.5M ? ? ? Estates Lakeville $9M 15% $50M ? ? ? Seaside $6M 8% $35.5M ? ? ? Greenville $3M 8% $10M ? ? ? Westlake $9M 8% $46.5M ? ? ? a. What the IRR of each investment? b. What the NPV of each investment? c. Given its budget of $18,000,000. which properties should VNO choose (use the profitability index)? d. Explain why the profitability index method could not be used if NNO's budget were 12,000,000 instead Which properties should KP choose this case? 2) International Paper (IP). based paper onglomerant is considering expanding its production capacity by purchasing newmachine. the TJ-50 The cost the TJ-750 is million Unfortunately installing this machine several months partially disrupt production The firm has just completed $50,000 feasibility study analyze the decision to buy the TJ-50 resulting the following estimates: . Marketing: Once the TJ 50 operating next year the extra capacity expected to merate $10 million per year in additional sales, which will continue for the 0-year life of the machine Operations: The disruption caused by the installation will decrease sales by $5 million this year Once th machine operating next year. the cost goods for the products produced TJ-50i expected tre be 70% of their sale price The increased roduction will require addi tional inventory on hand million obe added year and depleted year 10. . Human Resources: The expansion will require additional sales and administrative personnel at cost 2 million year. . Accounting: The TJ-50 lbe depreciated via the straight- line method over the 10 -year life machine The firm expectsreceivables from the new sales to be 15% revenues payables obe 10% the cost of goods sold IP's marginal corporate tax rate 35% a. Determine the incremental earnings from the purchase the TJ-50 b. Determine free cash flow from the purchase the If the appropriate cost capital for the expansion 10% compute the NPV of the purchase. d While the expected new sales will $10 million per year from the expansion estimates range from million $12 million What NPV in the worst case? the best case? What even level of new sales from the expansion? What is the break -even level for the cost of goods sold? could purchase the .90. which offers even greater capacity The cost TJ-90 i million. would not be useful irst two years of operation but would allow for additional sales years -10. What level additional sales (abovet $10 million expected for the year those years would justify purchasing the larger machine? 3) Keystone Industries an automobile manufacturer Management is currently evaluating proposal build 1 manufac lightweight trucks Keystone plans : capital of 12% this project Based research, it has prepared the following incremental free cash flow projections (in millions dollars): Year 0 Years 1-9 Year Revenues 100.0 100.0 Manulacturing expenses (other depreciation) 36.0 35.0 Marketing expenses -10.0 -10.0 Depreciation -15.0 15.0 EBIT 40.0 40.0 Taxes (36%) -14.0 -14.0 Unlevered income 26.0 26.0 + Depreciation +15.0 +15.0 Increases warking 5.0 5.0 Capital expenditures 150.0 + Continuation value +12.0 Free cash flow -150.0 36.0 48.0 a. For this base-case scenario, what the NPV of the plant omanucture lightweight trucks? b Based input from the marketing department Keystone uncertain abou its revenue forecast particular anagement would like examine the sensitivity NPV tothe revenue assumptions Whati the NPV project frevenues 10% higher than forecast? What s the NPV frevenues are 10% lower than forecast? c. Rather than assuming that cash flows for this project are constant, mana gement would like explore sensitivity of its analysis possible growth revenues and operating expenses Specifically. management would like to assume that revenues ufacturing expenses, and marketing expenses are given the table for year and grow 2%per year every year starting year Management also plans assume initial capital expenditures therefore depreciation). additions working capital. and continuation value remain initially specified i the table. Whatis the NPV this project under these alternative assumptions? How does the NPV change the revenues and operating expenses grow by 5% per year rather than by 2%? 4)The night before important budget meeting, you are reviewing the project valuation analysis you had your summer intern prepare for one the projects be discussed: 2 3 4 ERIT 10.0 10.0 10.0 Interest (5%) -4.0 -4.0 -3.0 -2.0 Earnings Before Taxes 8.0 Taxes preciation 26.0 25.0 25.0 25.0 Cap -100.0 NWC -20.0 20.0 Net Deb. 80.0 0.0 -20.0 -20.0 40.0 FCFE 40.0 28.6 8.6 9.2 9.8 NPV Equity Cost Capital 5.9 Looking over the spreadsheet you realize that while all of the cash flow estimates are correct, your associate used flow-to-equity valuation method discounted cash flow using the equity cost capital 11% However the project incremental leverage very different from the company historical debt -qquity ratie of 0.20: For this project, company will instead borrow $80 million upfront and repay $20 million year million year and $40 million year 4 Thus, project equity capital likely higher than the firm's constant over time- invalidating your associate calculation Clearly. FTE approach is not the best way analyze this project. Fortunately. you have your calculator with you. and with any luck you can use abetter method before the meeting starts. What the present value fthe interest tax shield associated with this project? b. What the free cash flows o project? c. Whati the best estimate of the project' value from the information given? 5) Sports Unlimited expected to generate free cash flows of $10.9 million per vear. THe has permanent debt $40 million, tax 40% and an unlevered 10% (15%) Whati the value of their equity using the APV method? What WACC? What their equity value using the WACC method? c. IXXL sdebt cost 5% what is their equity cost capital? d. What their equity value using the FTE method?

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