1)Capital budgeting criteria

A company has a 11% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following cash flows:

0

1

2

3

4

5

6

7

Project A	-$300	-$387	-$193	-$100	$600	$600	$850	-$180
Project B	-$405	$132	$132	$132	$132	$132	$132	$0

• What is each project’s NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.
• What is each project’s IRR? Round your answer to two decimal places.
• What is each project’s MIRR? (Hint: Consider Period 7 as the end of Project B’s life.) Round your answer to two decimal places. Do not round your intermediate calculations.
• From your answers to parts a-c, which project would be selected?
• Construct NPV profiles for Projects A and B. Round your answers to the nearest cent. Do not round your intermediate calculations. Negative value should be indicated by a minus sign.
• Calculate the crossover rate where the two projects’ NPVs are equal. Round your answer to two decimal places. Do not round your intermediate calculations.
• What is each project’s MIRR at a WACC of 18%? Round your answer to two decimal places. Do not round your intermediate calculations.

Project A: $

Project B: $

Project A: %

Project B: %

Project A: %

Project B: %

_________ Project A Project B

If the WACC was 18%, which project would be selected?

_________ Project A Project B

Discount Rate	NPV Project A	NPV Project B
0%	$	$
5	$	$
10	$	$
12	$	$
15	$	$
18.1	$	$
23.33	$	$

%

Project A: %

Project B: %Reset Pr

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2)Expected and Required Rates of Return

You have observed the following returns over time:

Year	Stock X		Stock Y		Market
2011	14	%	12	%	12	%
2012	19		5		9
2013	-12		-5		-11
2014	3		2		2
2015	19		10		14

Assume that the risk-free rate is 5% and the market risk premium is 6%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

• What is the beta of Stock X? Do not round intermediate calculations. Round your answer to two decimal places.
• What is the required rate of return on Stock X? Do not round intermediate calculations. Round your answer to one decimal place.
• What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Do not round intermediate calculations. Round your answer to one decimal place.

What is the beta of Stock Y? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is the required rate of return on Stock Y? Do not round intermediate calculations. Round your answer to one decimal place.

%

%

3) A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.39 million per year for 20 years. Plan B requires a $15 million expenditure to build a somewhat less efficient, more labor-intensive plant with an expected cash flow of $3.36 million per year for 20 years. The firm’s WACC is 9%. Calculate each project’s NPV. Round your answers to two decimal places. Do not round your intermediate calculations. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55.

Plan A: $ million

Plan B: $ million

Calculate each project’s IRR. Round your answer to two decimal places.

Plan A: %

Plan B: %

• By graphing the NPV profiles for Plan A and Plan B, approximate the crossover rate to the nearest percent.
• Calculate the crossover rate where the two projects’ NPVs are equal. Round your answer to two decimal places.
• Why is NPV better than IRR for making capital budgeting decisions that add to shareholder value? The input in the box below will not be graded, but may be reviewed and considered by your instructor.

%

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4)

Replacement Analysis

The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciation expenses of $650 for 5 years and $325 for the sixth year. Its current book value is $3,575, and it can be sold on an Internet auction site for $4,150 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life.

Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $13,000, and has an estimated useful life of 6 years with an estimated salvage value of $1,300. This steamer falls into the MACRS 5-years class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and would allow for an output expansion, so sales would rise by $2,000 per year; even so, the new machine’s much greater efficiency would reduce operating expenses by $1,400 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert’s marginal federal-plus-state tax rate is 40%, and its WACC is 12%.

below.

Should it replace the old steamer?

The old steamer _________ should should not be replaced.

What is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.

$

5) Assume that your father is now 50 years old, plans to retire in 10 years, and expects to live for 25 years after he retires – that is, until age 85. He wants his first retirement payment to have the same purchasing power at the time he retires as $60,000 has today. He wants all his subsequent retirement payments to be equal to his first retirement payment. (Do not let the retirement payments grow with inflation: Your father realizes that if inflation occurs the real value of his retirement income will decline year by year after he retires). His retirement income will begin the day he retires, 10 years from today, and he will then receive 24 additional annual payments. Inflation is expected to be 5% per year from today forward. He currently has $150,000 saved and expects to earn a return on his savings of 10% per year with annual compounding.

How much must he save during each of the next 10 years (with equal deposits being made at the end of each year, beginning a year from today) to meet his retirement goal? (Note: Neither the amount he saves nor the amount he withdraws upon retirement is a growing annuity.) Do not round intermediate calculations. Round your answer to the nearest dollar.

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