1. Below are two after-tax cash flows for two proposed projects, K and T. If WACC = 10.00%, which project(s) would be acceptable?
Year 0 1 2 3
K -20,000 9,000 9,000 9,000
T -20,000 0 0 26,500
NPV(K) > 0, acceptable; NPV(T) > 0, acceptable
NPV(K) > 0, acceptable; NPV(T) < 0, reject
NPV(K) < 0, reject; NPV(T) > 0, acceptable
NPV(K) < 0, reject; NPV(T) < 0, reject
2. Given the below after-tax cash flow for two proposed projects. You can only do one of the projects; which proposed project would you choose if the WACC is 9.89%.
Year 0 1 2 3 4
A -250 75 75 75 75
B -250 100 100 100 0
NPV(A) > NPV(B), choose A
NPV(B) > NPV(A), choose B
NPV(A) < 0, NPV(B) < 0, choose neither
NPV(A) = NPV(B), choose either
EXTRA CREDIT: You are asked to select the proposed project A or B that has the highest Operating Cash Flow (OCF). Proposed Project A has estimated net income = - $2,400, depreciation expense of $7,200 and non-cash revenue = $1,000. Proposed Project B has estimated net income = -$1,000, depreciation of $5,000 and non-cash revenue = $500. The other analyst selects Proposed Project A as the highest OCF; you ____ because ____.
Agree; Proposed Project A net income is more negative than Proposed Project B net income.
Disagree; Proposed Project A's OCF is lower than Proposed Project B's OCF
Disagree; Proposed Project A OCF is negative, Proposed Project B OCF is positve.
Agree; Proposed Project A OCF is higher than Proposed Project B OCF..