FIND A SOLUTION AT Academic Writers Bay
FNCE 370v8 Assignment 3
1. Define mutually exclusive investment decisions, and give an example of this type of decision. (3 marks)
2.Consider the following cash flow[100,+230,132].We want to decide under what range of discount rate this is an advantageous investment. But noting the change in sign, we conclude IRR is not a suitable instrument.(10 marks)
a. Write the expression for NPV using the unknown r as discount rate.
b. Write this expression as a function of[1/(1+r)].
c. Show that the expression in (b) as a quadratic equation. Look this up if necessary.
d. Solve the quadratic equation for its two roots.
e. Prepare a table of NPV vs .r for r=0, 10, 20, 40, 100%.
f. Draw the graph of NVP vs .r.
g. Under what range of r values is this an acceptable investment?
h. Noting that NPV increases then declines as r grows from 0to 40%, determine at what level of r NPV is a maximum (recall that d(NPV)/d s=0, where NPV is a maximum). If you have sufficient back ground, solve this using calculus. If not, graphically find the top of the NPV hill (where slope =0).
What is the maximum value of NPV? (There is one bonus point for the correct answer using calculus).
3.Considerthe followinginformationforprojectsAandB,whicharemutuallyexclusive.(7 marks)
Year 
Project A 
Project B 
Note 
0 
100,000 
120,000 
A –B = 100,000 –(120,000)= +20,000 
1 
31,250 
0 

2 
31,250 
0 

3 
31,250 
0 

4 
31,250 
0 

5 
31,250 
200,000 

a. At what discount rate will the two projects have the same net present value?
b. At the discount rate of 10%, which is the better project?
(Hint 1: If the two projects have the same NPV, then NPVA – NPVB = 0. You can subtract line by line.) (Hint 2: If the difference in initial investment comes out positive and your financial calculator is programmed to accept negative PV, adjust the FV accordingly.)
4. Canadian Classics manufactures parts for classic automobiles. The CFO is considering the purchase of a twoton press, which will allow the firm to stamp auto fenders. The equipment costs $250,000. The project is expected to produce aftertax cash flows of $80,000 per year. Liquidating the equipment will net the firm $10,000 in cash at the end of five years. The firm requires a 15% rate of return on all investments. The firm’s tax rate is 38%. Ignore the effects of CCA. (10 marks)
a. What is the payback period for the proposed investment?
b. What would happen to the payback period if the sale of the equipment at the end of five years nets the firm $200,000, rather than $10,000?
c. What is the project’s discounted payback period?
d. What is the project’s net present value?
e. What is the project’s profitability index?
f. What is the project’s internal rate of return?
5. (4 marks) a. Why is it important to consider additions to net working capital in developing cash flows?
b. What is the effect of an increase in net working capital on a project’s operating cash flow?
c. What normally happens to the additions to net working capital as the project winds down?
6. Given the following cash flows for two mutually exclusive projects (A and B), which project should be chosen?
Assume that the required rate of return of both projects is 11%. (Hint: Use EAC.) (10 marks)
YearProject 
A 
B 
0 
$1,000,000 
$850,000 
1 
300,000 
187,500 
2 
300,000 
187,500 
3 
300,000 
187,500 
4 
300,000 
187,500 
5 
300,000 
187,500 
6 

187,500 
7 

187,500 
8 

187,500 
7. A firm is considering bidding on a project to produce eight widgets per year for the next four years. In order to complete the project, the firm must lease facilities for $30,000 per year, purchase equipment that costs $100,000, as well as pay labour and material costs of $19,000 per unit produced. The equipment can be depreciated at the Class 8 CCA rate of 20%. At the end of the fourth year, it can be sold for $10,000, and the asset class will remain open after the disposal of the equipment. In addition, net working capital will increase by $50,000 if the project is undertaken, but these can be recovered at the end of the project. The company’s tax rate is 40%.
What is the minimum bid per widget if the firm requires 18% return on its investment? (10 marks)
8. You are evaluating a project for Ultimate Inc. The project produces chewresistant doghouses. You estimate the sales price of these doghouses to be $500 and sales volume to be 2,500 units per year over the project’s threeyear life. Variable costs amount to $300 per unit and fixed costs (not including depreciation) are $150,000 per year. The project requires an initial investment of $250,000 and this will be depreciated on a straightline basis to zero over the threeyear project life. There will be an initial net working capital investment of $90,000 (t0) and two further investments of $90,000 at the beginning of each year thereafter. The full amount of working capital will be recovered at the end of the project’s life (i.e., $270,000 at t3). The tax rate is 35% and the required return on the project is 15%. (10 marks)
a. What is the EBIT for the project in the first year?
b. What is the operating cash flow for the project in year 2?
c. Suppose the actual market value of the initial investment at the end of year 3 is $50,000. What is the effect of the $50,000 salvage value on year 2 cash flows?
d. What is the NPV of this project?
9. Describe how the inclusion of a strategic option can affect setting a bid price. (4 marks)
10. A project requires an initial investment of $10,000, straightline depreciable to zero over four years. The discount rate is 10%. The firm’s tax bracket is 34%, and they receive a tax credit for negative earnings in the year in which the loss occurs. Additional information for variables with forecast error is shown below: (10 marks)
Item 
Base Case 
Lower Bound 
Upper Bound 
Unit Sales 
3,000 
2,750 
3,250 
Price/Unit 
$14 
$13 
$16 
Variable cost/unit 
$9 
$10 
$8 
Fixed costs 
$9,000 
$10,000 
$8,500 
a. What is the base case NPV for the project?
b. What is the worst case NPV for the project?
c. What is the best case NPV for the project?
d. Suppose you want to conduct a sensitivity analysis for the possible changes from the base case in unit sales. What is the IRR when the sales level equals 3,250 units?
e. Suppose you are interested in the project’s sensitivity to unit price. What is the NPV for the base case at a price of $13 per unit?
f. What is the base case accounting breakeven point?
g. What is the base case cash breakeven point?
h. What is the base case financial breakeven point? Ignore taxes.
11. A firm is considering the purchase of equipment which will cost $3 million. This equipment will last for 10 years, at the end of which it can be sold for $800,000. The CCA rate for this asset class is 30%, and the firm expects to have other assets in this asset class at the end of year 10. This equipment is expected to increase beforetax operating cash flows by $750,000 per year. However, in order to put the equipment to use, an additional $150,000 will need to be invested in net working capital initially (i.e., at t=0). The required rate of return is 16% and the firm’s marginal tax rate is 35%. (12 marks)
a. Should the firm purchase this equipment?
b. Suppose that to arrive at the beforetax operating cash flows in part (a), we have used the following estimates:
Fixed costs = $120,000
Variable costs = 60% of sales
What is the Net Present Value of the new equipment if, in the bestcase scenario, we estimate that fixed costs could be lower by 20% and sales revenues could be higher by 25%?
c. Given the information in (a), and assuming that fixed costs are $120,000 and variables costs are 60% of sales, what is the sales level at which Net Present Value equals zero? (In other words, what is the financial breakeven sales level?)
12. A project has the following estimated data: price = $65 per unit; variable costs = $33 per unit; fixed costs = $4,000; required return = 16%; initial investment = $9,000; life = three years. Ignore the effect of taxes and assume straightline depreciation to zero. (10 marks)
a. What is the accounting breakeven quantity?
b. What is the cash breakeven quantity?
c. What is the financial breakeven quantity?
d. What is the degree of operating leverage at the financial breakeven level of output?
“CUSTOM PAPER”
 WE OFFER THE BEST CUSTOM PAPER WRITING SERVICES. WE HAVE DONE THIS QUESTION BEFORE, WE CAN ALSO DO IT FOR YOU.
 Assignment status: Already Solved By Our Experts
 (USA, AUS, UK & CA PhD. Writers)
 CLICK HERE TO GET A PROFESSIONAL WRITER TO WORK ON THIS PAPER AND OTHER SIMILAR PAPERS, GET A NON PLAGIARIZED PAPER FROM OUR EXPERTS
QUALITY: 100% ORIGINAL PAPER – NO PLAGIARISM – CUSTOM PAPER
Why Choose Us?
 100% nonplagiarized Papers
 24/7 /365 Service Available
 Affordable Prices
 Any Paper, Urgency, and Subject
 Will complete your papers in 6 hours
 Ontime Delivery
 Moneyback and Privacy guarantees
 Unlimited Amendments upon request
 Satisfaction guarantee
How It Works
 Click on the “Place Your Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
 Fill in your paper’s requirements in the “PAPER DETAILS” section.
 Fill in your paper’s academic level, deadline, and the required number of pages from the dropdown menus.
 Click “CREATE ACCOUNT & SIGN IN” to enter your registration details and get an account with us for recordkeeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page.
 From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.
About AcademicWritersBay.com
AcademicWritersBay.com is an easytouse and reliable service that is ready to assist you with your papers 24/7/ 365days a year. 99% of our customers are happy with their papers. Our team is efficient and will always tackle your essay needs comprehensively assuring you of excellent results. Feel free to ask them anything concerning your essay demands or Order.
AcademicWritersBay.com is a private company that offers academic support and assistance to students at all levels. Our mission is to provide proficient and high quality academic services to our highly esteemed clients. AcademicWritersBay.com is equipped with competent and proficient writers to tackle all types of your academic needs, and provide you with excellent results. Most of our writers are holders of master’s degrees or PhDs, which is an surety of excellent results to our clients. We provide assistance to students all over the world.
We provide high quality term papers, research papers, essays, proposals, theses and many others. At AcademicWritersBay.com, you can be sure of excellent grades in your assignments and final exams.