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Requirement:
(a) Compute NPV of the new investment of the company and give
your suggestion to the top management if the discount rate is
12%.
(b) What would be your suggestion if the discount rate is 24%.
(c) Calculate the payback period and discounted payback period of
the project.
(d) Calculate the profitability index of the project for discount rate
12%
Problem # 2
Alpha Corporation has the opportunity to invest in a machine that costs
$550,000. The revenue will be $ 250,000 and Expenses excluding
depreciation will be $ 50,000 per year. Tax rate will be 20%. The
company follows straight line depreciation method. Assume salvage
value is zero. If the economic life of the machine is 10 years and the
relevant discount rate is 10 %, what would be the NPV of the
Investment?
Problem # 3
Apex Corporation has the opportunity to invest in a project that
requires $600,000 for equipment and initial installation cost $40,000 to
implement the project. The revenue will be $ 300,000 and Expenses
excluding depreciation will be $ 25,000 per year. Tax rate will be 30%.
The initial cost and the installation cost will be depreciated using a
straight line method. Assume salvage value is $ 40,000. If the
economic life of the machine is 12 years and the relevant discount rate
is 12 %, what would be the NPV of the Investment?
Problem # 4
IIB Corporation wants to start a new project of water refining Project
that requires $500,000. The total cost of the project consists the cost
of equipment $ 300,000. The revenue will be $ 200,000 and Expenses
excluding depreciation will be $ 20,000 per year. Tax rate will be 20%.
The company follows straight line depreciation method. Assume
salvage value is zero. If the economic life of the machine is 6 years and
the relevant discount rate is 10 %, should the IIB Corporation starts the
project?
Problem # 5
Dhaka Corporation is considering investing a machine to produce
computer keyboards. The price of the machine will be tk. 400,000 and
its economic life five years. The machine will be fully depreciated by
the straight-line methods. The machine will produce 10,000 units of
key boards each year. The price of the keyboard will be tk. 40 in the
first year which will be increasing by 10% per year. The production cost
per unit of the keyboard in the beginning year will be tk. 20 that will be
increased by 5% in each year. The opportunity cost of the investment
is tk. 5,000 per year, and sunk cost of the company is tk. 13,000.The
corporate tax rate for the company is 30%. If the appropriate discount
rate is 15%, what is the NPV of the investment?
Problem # 6 (Scenario Analysis)
Consider the following Cash Flows of Argentina Ltd. and calculate the
expected NPV:
Scenario
0
1
2
3
4
5
Pessimist 50,000 50,000 50,000 100,00 100,00
ic
500,00
0
0
0
Expected 150,00 150,00 250,00 250,00 350,00
500,00 0
0
0
0
0
0
Optimisti 250,00 250,00 350,00 350,00 400,00
c
500,00 0
0
0
0
0
0
6
150,00
0
400,00
0
450,00
0
Opportunity cost
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Requirement:
(a) Determine the cash flows of project for different years.
(b)The company has taken tk. 4000 loan from AB Ltd. at the rate of
9% interest, and issued 600 shares with tk. 10 per share in DSE
for financing the project. The average rate of return of DSE is
15% while interest rate for BD governments saving certificate is
6%. If the beta of the firm is 1.3, what is the cost of capital
(WACC) of the project?
(c) Calculate the NPV and evaluate the project based on the NPV.
Instruction: Please attempt to solve these problems based on project
evaluation concepts discussed in the class. Feel free to consult with
me or the GA for any further clarification.
Last Date of Submission: 20 February, 2013 (Not later than 5.50 pm)