GRAND CANYON FIN504 MODULE 6 Assignment Long-Term Investment Decisions Problems
Using Excel, and the Gitman chapters 10, 11, and 12 Excel resource, if needed, complete the following problems from chapters 10, 11, and 12 inPrinciples of Managerial Finance:
- P10-1
- P10-5
- P10-21
- P11-3
- P11-12
- P12-2
- Integrative Case 5: Lasting Impressions Company
Please show all work for each problem.
Calculation of the NPV, IRR, and the Payback Period
Facts of case:
maturity (n) 10 years
cost-of-capital (k) 0.13
Initial outlay (pv) 15000000
Excel function =IRR(B12:B22)
Estimated Trial and error 0.147630974
Cash NPV Technique IRR Technique
Year Outflows/Inflows PV PV Payback Technique
0 =-B7 =B12/(1+$B$6)^A12 =B12/(1+$E$9)^A12
1 600000 =B13/(1+$B$6)^A13 =B13/(1+$E$9)^A13 =B12+B13
2 1000000 =B14/(1+$B$6)^A14 =B14/(1+$E$9)^A14 =G13+B14
3 1000000 =B15/(1+$B$6)^A15 =B15/(1+$E$9)^A15 =G14+B15
4 2000000 =B16/(1+$B$6)^A16 =B16/(1+$E$9)^A16 =G15+B16
5 3000000 =B17/(1+$B$6)^A17 =B17/(1+$E$9)^A17 =G16+B17
6 3500000 =B18/(1+$B$6)^A18 =B18/(1+$E$9)^A18 =G17+B18
7 4000000 =B19/(1+$B$6)^A19 =B19/(1+$E$9)^A19 =G18+B19 =G19/B19
8 6000000 =B20/(1+$B$6)^A20 =B20/(1+$E$9)^A20 =G19+B20
9 8000000 =B21/(1+$B$6)^A21 =B21/(1+$E$9)^A21 =G20+B21
10 12000000 =B22/(1+$B$6)^A22 =B22/(1+$E$9)^A22 =G21+B22
=SUM(C12:C22) =SUM(E12:E22) =A18+H19 years
Recap:
NPV =C23 Accept the project as the NPV > 0.
IRR =E8 Approximately as it equates the NPV to Zero.
Accept the project as the IRR (14.76%) > Cost of Capital (13%)
Payback =H23 years approximately
The Damon Corporation
Calculation of the Initial Investment
Installed cost of proposed machine
Cost of proposed machine $145,000
plus: Installation costs 15,000
Total installed cost - proposed $160,000
(depreciable value)
After-tax proceeds from sale of present machine
Proceeds from sale of present machine $70,000
less: Tax on sale of present machine 14,080
Total after-tax proceeds - present $55,920
Change in net working Capital 18,000
Initial investment $122,080
Tax on sale of old machine Change in Working Capital
cost of old machine $120,000 Increase in receivables $15,000
MACRS increase in inventory 19,000
year 1 20% 24,000 increase in payables 16,000
year 2 32% 38,400 Net working capital $18,000
year 3 19% 22,800
Book Value $34,800
Sale price of old machine $70,000
Gain on sale $35,200
Tax rate 40%
Tax Expense $14,080
Depreciation Expense for Proposed and Present
Machines for the Damon Corporation
Year Cost Applicable MACRS depreciation Depreciation
With proposed machine
1 $160,000 20% $32,000
2 160,000 32% 51,200
3 160,000 19% 30,400
4 160,000 12% 19,200
5 160,000 12% 19,200
6 160,000 5% 8,000
Total 100% $160,000
With present machine
1 $120,000 12% $14,400
2 120,000 12% 14,400
3 120,000 5% 6,000
4 0
5 0
6 0
Total $34,800
Calculation of Operating Cash Inflows for Damon Corporation
Proposed and Present Machines
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
With proposed machine
Earnings before depr. and int. and taxes $105,000 $110,000 $120,000 $120,000 $120,000 $-
Depreciation #REF! #REF! #REF! #REF! #REF! #REF!
Earnings before interest and taxes #REF! #REF! #REF! #REF! #REF! #REF!
Taxes 40% #REF! #REF! #REF! #REF! #REF! #REF!
Net operating profit after taxes #REF! #REF! #REF! #REF! #REF! #REF!
Depreciation #REF! #REF! #REF! #REF! #REF! #REF!
Operating cash inflows #REF! #REF! #REF! #REF! #REF! #REF!
With present machine
Earnings before depr. and int. and taxes $95,000 $95,000 $95,000 $95,000 $95,000 $-
Depreciation #REF! #REF! #REF! #REF! #REF! #REF!
Earnings before interest and taxes #REF! #REF! #REF! #REF! #REF! #REF!
Taxes 40% #REF! #REF! #REF! #REF! #REF! #REF!
Net operating profit after taxes #REF! #REF! #REF! #REF! #REF! #REF!
Depreciation #REF! #REF! #REF! #REF! #REF! #REF!
Operating cash inflows #REF! #REF! #REF! #REF! #REF! #REF!
The Damon Corporation
Calculation of the Terminal Cash Flow
After-tax proceeds from sale of proposed machine
Proceeds from sale of proposed machine $24,000
Book value as of end of year 5 8,000
Net gain $16,000
Tax on gain 40% 6,400
Total after-tax proceeds - proposed $9,600
After-tax proceeds from sale of present machine
Proceeds from sale of present machine $8,000
Book value as of end of year 5 0
Net gain $8,000
Tax on gain 40% 3,200
Total after-tax proceeds - present $4,800
Change in net working capital #REF!
Terminal Cash Flow #REF!
Mutually Exclusive Projects
Project Alpha Project Beta
Annual Annual
Cash 10% Cash 10%
Year Outflow/Inflow PVIF NPV PVIFA ANPV Year Outflow/Inflow PVIF NPV PVIFA ANPV
0 -5,500,000 1.0000 $(5,500,000) 0 -6,500,000 1.0000 $(6,500,000)
1 300,000 0.9091 272,727 1 400,000 0.9091 363,636
2 500,000 0.8264 413,223 2 600,000 0.8264 495,868
3 500,000 0.7513 375,657 3 800,000 0.7513 601,052
4 550,000 0.6830 375,657 4 1,100,000 0.6830 751,315
5 700,000 0.6209 434,645 5 1,400,000 0.6209 869,290
6 800,000 0.5645 451,579 6 2,000,000 0.5645 1,128,948
7 950,000 0.5132 487,500 7 2,500,000 0.5132 1,282,895
8 1,000,000 0.4665 466,507 8 2,000,000 0.4665 933,015
9 1,250,000 0.4241 530,122 9 1,000,000 0.4241 424,098 5.7590
10 1,500,000 0.3855 578,315 $350,116 $60,794
11 2,000,000 0.3505 700,988
12 2,500,000 0.3186 796,577 6.8137
$383,499 $56,284
Reviewing the NPV's calculated for the two mutually exclusive projects, we see that project Alpha would be preferred over project Beta
as Alpha has a NPV of $383,499 relative to the NPV of Beta which is $350,116.
However, when we compare these mutually exclusive projects on the basis of their respective ANPVs, project Beta would be preferred over
project Alpha because it provides the higher annualized net present value ($60,794 versus $56,284).
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Rating:
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Solution: GRAND CANYON FIN504 MODULE 6 Assignment Long-Term Investment Decisions Problems