Assignment: Capital Budgeting
Show all inputs, outputs and additional calculations for full credit.
Table 1
PepsiCo is considering a new project. Cash flow analysis indicates the following
|
Initial cost in Year 0:
|
|
|
Year 0
|
-$100,000
|
|
Year 1
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$4,000
|
|
Year 2
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$6,000
|
|
Year 3
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$22,000
|
|
Year 4
|
$47,000
|
|
Year 5
|
-$82,000
|
|
Year 6
|
$27,000
|
1. Refer to Table 1 above. Assume the weighted average cost of capital = 10%.
A) What is the Net Present Value for this Project?
Would you accept or reject the project?
Explain why or why not.
B) What is the Internal Rate of Return for this Project?
Would you accept or reject the project?
Explain why or why not.
C) Which method is better for this project?
2. Assume Keurig Inc is evaluating whether or not to purchase a piece of equipment that will involve an initial outlay or cost of $1 million. Assume a production of a new product line will begin 6 months following installation and will yield the following estimated Operating Cash Flows per year for the following years listed in Table 2 below:
Table 2
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Year 1
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$30,000
|
|
Year 2
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$120,000
|
|
Year 3
|
$410,000
|
|
Year 4
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$500,000
|
|
Year 5
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$600,000
|
|
Year 6
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$450,000
|
|
Year 7
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$400,000
|
In addition...
At the end of Year 7, the equipment will be sold for an after tax terminal value of $10,000.
Assume the wacc=12%
A) What is the Internal Rate of Return (IRR)?
B) Would you accept or reject the project?
C) Explain why or why not?
3. Refer to Table 3below.
Table 3
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Year
|
Cash Flow
|
|
0
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-$102,000
|
|
1
|
$15,000
|
|
2
|
$60,000
|
|
3
|
$50,000
|
|
4
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$57,000
|
|
5
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$80,000
|
|
6
|
$17,000
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A) Given Table 3, what is the Payback Period?
B) Assume you want your money back within 3.75 years. Would you accept or reject the project?
4. Refer to Table 4below.
Table 4
|
Year
|
Cash Flow
|
|
0
|
-$205,000
|
|
1
|
$ 15,000
|
|
2
|
$11,000
|
|
3
|
$60,000
|
|
4
|
$45,000
|
|
5
|
$77,000
|
|
6
|
$115,000
|
A) Assume the wacc =5%. What is the Discounted Payback Period?
B) Assume you want your money back within 5.5 years. Would you accept or reject the project?
C) Explain why or why not.
5. Given the following Cash flows for Project A and Project B respectively, calculate the Modified Internal Rate of Return (MIRR) for Project A and the MIRR for Project B. Assume the company has a wacc=8%.
|
Year
|
Cash Flows Project A
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Cash Flows Project B
|
|
0
|
-120,000
|
- 50,000
|
|
1
|
45,000
|
-100,000
|
|
2
|
55,000
|
20,000
|
|
3
|
-25,000
|
80,000
|
|
4
|
90,000
|
250,000
|
|
5
|
90,000
|
25,000
|
|
6
|
-13,000
|
-100,000
|
A) If these projects are independent, which project(s) would you accept?
B) If these projects are mutually exclusive, which project(s) would you accept?
C) If Project B is a riskier project than Project B, would you use the same wacc to evaluate both Project A and Project B?
6. Given the five methods presented in Capital budgeting, which method is the best for evaluating a projects contribution to firm value. In a paragraph explain your answer. Include the advantages and disadvantages of the method you chose.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also include a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also Include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.