Asked by moduloP 5 years ago

**Assignment: CASE STUDY**

**ANSWER THE FOLLOWING QUESTION:**

How accurate do you think a company's estimates of the net present value of a proposed project are? Refer to both the initial investment and to the components of the cash flow: revenues, operating expenses, depreciation, taxes, and the cost of capital to use for the computation of the present value. Keep in mind that NPV is the value in today's dollars of cash flows to be received some time in the future (just like the gold mine example back in Module 2) minus what we have to pay today to get those cash flows.

Which of the following do you think would give you the most accurate NPV calculation: (a) a brand new retail startup

(b) a pharmaceutical company introducing a new drug

(c) a company with a successful product in Chile trying to introduce it to the US

**Part 1. Capital Budgeting Practice Problems**

a. Consider the project with the following expected cash flows:

Year Cash flow

0 - $400,000

1 $100,000

2 $120,000

3 $850,000

If the discount rate is 0%, what is the project's net present value?

If the discount rate is 2%, what is the project's net present value?

If the discount rate is 6%, what is the project's net present value?

If the discount rate is 11%, what is the project's net present value?

What is this project's modified internal rate of return?

*Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. connect the four points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?*

b. Consider a project with the expected cash flows:

Year Cash flow

0 -$815,000

1 $141,000

2 $320,000

3 $440,000

What is this project's ** internal rate of return**?

If the discount rate is 1%, what is this project's net present value?

If the discount rate is 4%, what is this project's net present value?

If the discount rate is 10%, what is this project's net present value?

If the discount rate is 18%, what is this project's net present value?

*Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. connect the four points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?*

c. A project requiring a $4.2 million investment has a profitability index of 0.94. What is its **net present value**? (Remember: Profitability Index is defined as Present Value of the proceeds divided by the initial investment)

**Part 2.**

Read the article linked below. Then write a one-to-two page paper answering the following question:

*Which method do you think is the better one for making capital budgeting decisions - IRR or NPV?*

**Assignment Expectations:**

This assignment consists of a quantitative section (Part 1) and a an essay section (Part 2) below. Upload both sections as one Word document to Coursenet by the end of the Module

Case Study

moduloP

Answered by moduloP 5 years ago

**Excerpt from file: **Finance Tutorial Assignment: CASE STUDY ANSWER THE FOLLOWING QUESTION: How accurate do you think a company's estimates of the net present value of a proposed project are? Refer to both the initial investment and to the components of the cash flow: revenues, operating expenses, depreciation, taxes,

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Surround your text in `*italics*`

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Asked: 5 years ago