Capital Budgeting Problem Set - Building The Pride
Capital Budgeting Problem Set - Building The Pride
Capital Budgeting Problem Set - Building The Pride
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$700,000 ($200,000 for the land and $500,000 for the plant). What is the NPV of making<br />
this investment if the required rate of return is 16%. Should they make the investment?<br />
(NPV = -$1,130,630)<br />
32. Matrix Printers, Inc. discovered a totally new method of laser printing and insiders have<br />
stated that this the most revolutionary breakthrough ever made by the firm. Matrix<br />
estimates that to put the new printers into the production the firm will have to invest<br />
$1,000,000 and that the firm will be able to have positive cash flows of $500,000 per year<br />
for the next four years until the competition catches up. Matrix required rate of return is<br />
12%. What is the IRR on this new project? Is this a realistic estimate of Matrix actual<br />
earnings over the four year period? Can you help them make a better estimate of the<br />
firm's actual IRR over the period? What is that more realistic rate and why is it better?<br />
(IRR 34.90%; MIRR 24.33%)<br />
33. What is it that makes MIRR superior to IRR? Be precise and thorough.<br />
34. List three potential problems with using IRR in making capital budgeting decisions.<br />
35. Given the advantages of NPV over all other capital budgeting tools why would you ever<br />
want to compute payback, IRR, MIRR or PI?<br />
36. Would there ever be situations where a firm would knowingly accept projects with a<br />
negative NPV? If so, what might these be?<br />
37. Describe how an investment opportunity schedule and an MCC schedule can be used<br />
together to determine the optimal capital budget. What would you do if a break point in<br />
the MCC schedule came in the middle of one of the projects on the investment<br />
opportunity schedule. you may use a simple example to illustrate , if you like.<br />
38. Capitol City transfer Company is considering building a new terminal in Salt Lake City.<br />
If the company goes ahead with the project, it will spend $1 million immediately and<br />
another $1 million at the end of year 1. It will then receive net cash flows of $500,000 at<br />
the end of years 2-5, and it expects to sell the property for $1 million at the end of year 6.<br />
<strong>The</strong> company's cost of capital is 12 percent, and it used the MIRR criterion for capital<br />
budgeting decisions. What is the project's MIRR? (MIRR 11.7%)<br />
39. Mary was thinking about buying some little lambs and raising the to sell. the lambs cost<br />
$5,000 (lamb prices are now abnormally low and may never be this low again) and Mary<br />
thought hat she could sell several lambs each year and thus receive $3,500 per year for<br />
the next three years. Mary, being the sophisticated investor that she was, calculated the<br />
IRR on this investment and found it to be almost 49%. Mary thought that this seemed<br />
very high, given that she normally earned about 15% on lamb investments. If Mary’s<br />
returns are usually in the 15% range and will probably be about that in the further, can<br />
you help Mary to make a more realistic estimate of the actual rate of return that she can<br />
earn on her lamb investment over the next three years? Show and explain all of your<br />
work. (MIRR 34.46%)